Ernst & Young Settles with SEC over Weatherford Fraud

EY was fined once again by the SEC. This week Ernst and Young was fined by the SEC for their audit of oil services company Weatherford. 

The fine of EY will be combined with the fine of Weatherford to return over $150 million to investors.

Two partners at Ernst and Young were also penalized as part of this settlement with the SEC. Craig Fronckiewicz, who coordinated the audits of Weatherford, was suspended. Sarah Adams, who was the tax partner on Weatherford, was also suspended as part of the order. 

They agreed that they missed red flags as part of the audit.

Even though the SEC categorized Weatherford as high risk, they did not catch some fraudulent adjustments. EY didn’t detect anything wrong with the audit until 4 years into the fraud. 

The main problem with the audit was that the tax team booked a lot of post-close adjustments that were fraudulent. The tax team was making post-close adjustments to decrease the tax provision and increase net income. 

Instead of performing detailed work around the adjustments, EY just relied on management’s explanations to determine that the adjustments were reasonable. 

The SEC stated that EY and their national office did not perform sufficient audit procedures to cover the areas of weakness. 

Weatherford SEC Case Background

In September 2016, the SEC fined Weatherford Internaitonal for deceptive income tax accounting practices. The SEC fined Weatherford $140 million dollars over the matter. The deceptive income tax accounting practices were attributed to two top accounting executives. 

The two executives involved were James Hudgins and Darryl Kitay. James Hudgins was a vice president of tax. Daryl Kitay was a tax manager in the tax department. 

Weatherford allegedly lowered their income tax provision by about $100 million to align their earnings with projections. Both Hudgins and Kitay made post-close adjustments to the tax provision to help close earnings gaps. The two also wanted to make the effective tax rate (“ETR”) look better to management and investors. Weatherford regularly brought up its favorable ETR as a differentiator in the marketplace. The problem was the ETR was not accurate so they misled many investors. 

Weatherford was forced to restate their financial statements.

Hudgins and Kitay also had to pay fines to the SEC. Hudgins has to $334,067 while Kitay had to pay $30,000. Both cannot participate in the financial reporting or audit of public companies. They can ask for reinstatement in 5 years. 

Conclusion

Ernst & Young has been receiving a lot of heat lately on its audits, especially from the SEC. Weatherford has had trouble with its taxes for years. EY should have known to look harder at the numbers in the midst of all Weatherford’s problems. PwC was also involved in advising Weatherford around their taxes, so we’ll have to see whether PwC is pulled into this scandal as well. 

The SEC is stepping up their investigations making it harder to be a partner at the big 4 public accounting firms.

Being an audit and tax partner at the big 4 is not what it used to be. The toughest decision partners used to make was what cognac they’d drink after dinners with clients. Now they have to decide whether or not they want to be on a high-risk client. 

Being a partner is not a feet-up job anymore. You can severely damage your reputation and career if you don’t put some effort into your job. This might sound obvious, but there are many partners in the big 4 that don’t take their jobs very seriously. They think their jobs are to just entertain their clients. If you are in the big 4 or want to work in the big 4, keep your eyes peeled for fraudulent activity. If you don’t, you risk damaging your reputation and losing your job. 

 

 

2017-01-25T17:03:53+00:00October 23rd, 2016|Categories: EY|Tags: , , , |0 Comments

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