PR pros on how Ernst & Young can rebound after cheating scandal results in $100m SEC fine
Ernst & Young has been hit with the biggest SEC fine ever doled out to an accounting firm after the company’s auditors were found cheating on CPA exams. Now, public relations and crisis communications professionals weigh in on what the company can do to refurbish its reputation.
Ernst & Young is in hot water for loopholing ethics requirements / Adobe Stock
The US Securities and Exchange Commission (SEC) today slapped accounting giant Ernst & Young with a $100m fine after an investigation revealed that the firm’s auditors systematically cheated on ethics exams from 2017 to 2021. It’s the largest fine ever dished out to an auditing firm by the government agency.
Auditors like those employed by Ernst & Young, often referred to by the shorthand EY, play moral and regulatory arbiters in the world of finance; they’re charged with confirming the accuracy and legitimacy of organizations’ financial filings. They are able to step in and warn companies that are treading in murky water so as to help them get back on course and avoid government penalties.
But now it's EY that's in murky waters. In a decision announced today, the SEC found that hundreds of EY auditors cheated on compulsory ethics exams and professional education courses taken for licensing purposes — including exams that aim to ensure that accountants can effectively evaluate whether an organization is in compliance with Generally Accepted Accounting Principles. It also said the firm did not sufficiently address the problem internally.
“This action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our Nation’s public companies. It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things,” Gurbir S Grewal, director of the SEC’s enforcement division, said in a statement.
What’s more, however, the SEC says its investigators were misled and deceived as EY tried to cover its tracks. “Ernst & Young hindered our investigation of this misconduct,” Grewal said. “This action should serve as a clear message that the SEC will not tolerate integrity failures by independent auditors who choose the easier wrong over the harder right.”
EY has now admitted that over a number of years, a “significant number of EY audit professionals” cheated on CPA exams, per the SEC’s announcement. It has agreed to pay the $100m SEC fine as well as sign onto a slate of remedial initiatives required by the agency. These include working with two individual consultants who will, respectively, review EY’s ethics and integrity policies, and review the company’s disclosure failures in order to determine which, if any, employees were involved in the firm’s decision to mislead investigators.
The firm says it will comply with these measures and will exercise its own efforts to remedy internal issues. “We have repeatedly and consistently taken steps to reinforce our culture of compliance, ethics and integrity in the past,” Suzanne Bouhia, EY’s Americas chief communications officer, told the Washington Post today. “We will continue to take extensive actions, including disciplinary steps, training, monitoring and communications that will further strengthen our commitment in the future.”
Facing the blowback
Now, public relations and crisis communications professionals say the damage isn’t just financial; the auditing titan is likely to see lasting reputational harm, too. “[The organization's reputation] will be impacted to a great degree,” says John Gottschall, chief executive officer at reputation management firm Neumann Paige. “A company like EY sells trust-based services. It's a very big issue. Cheating is something almost everyone is opposed to, but given the industry, it impacts EY and firms like them quite a bit more than the average business.”
Considering this isn’t the first time EY has been under the gun for cheating, Gottschall says today’s announcement is especially damning. Previously, an internal EY investigation revealed that between 2012 and 2015, more than 200 employees took advantage of a software workaround that enabled them to cheat on exams. In the aftermath of these findings, EY penalized those involved and issued warnings against cheating.
Gottschall predicts that EY could lose some of its key accounts to competitors over today’s news. “This can cause firms with long relationships to start to shop other businesses.”
And according to Dr Karen Freberg, a professor of strategic communications at the University of Louisville, with a fine as large as this, it’s not just EY that will face backlash, but the industry at large “This may not just be a one-company issue, but [rather] something that needs to be addressed in the industry,” she says. “No one wants to have [to ask] the question, ‘Is the team I hired here because they cheated on their exams?’”
The road to reestablishing trust
Despite the blowback already underway, both Freberg and Gottschall say there is a clear path forward for EY. The first step? Facing the fire. “EY needs to deal with this head-on with their existing client base,” says Gottschall. “EY can't make the mistake of running from the issue, because competitors like Delloitte and KPMG will certainly be hitting those large sought-after accounts and will likely be bringing this up.”
From a more fundamental perspective, Freberg suggests EY would do well to put internal resources toward cleaning up its culture. “EY needs to get to the bottom of why this happened to better understand the motivational point for why their employees felt compelled to cheat. Was it external pressure? Something they have done before in their work and education? Or was it because they felt it was the only way to do this?”
She also proposes that, at base, perhaps the deep-seated norms and standards within the accounting industry should be reevaluated. The CPA exams required for licensing may not be designed for professionals with different learning preferences and abilities, she argues. “Most of these exams test in one way of thinking and learning, so they are not adaptive to the range of learning styles,” she says. “For example, one professional may excel on multiple choice exams because they know how to answer these, but it may not be the right way to test someone else.”
At the end of the day, however, both experts remain confident in EY’s ability to maintain a stronghold in the industry. Per Gottschall: “This [is a] very bad thing for EY, but they are EY and will recover.”