Securities Regulation Daily EY must pay $10M for auditor independence violations
Monday, August 2, 2021

EY must pay $10M for auditor independence violations

By John M. Jascob, J.D., LL.M.

The Commission alleged that the Big Four accounting firm and three partners improperly interfered with the selection of an independent auditor by the maker of Bubble Wrap.

Ernst & Young LLP had agreed to pay $10 million to settle SEC charges that the firm violated auditor independence rules in connection with its quest to serve as Sealed Air Corporation’s independent auditor. The Commission’s order alleges that EY, one current partner, and two former partners solicited and obtained confidential competitive intelligence and audit committee information during the request for proposal (RFP) process from Sealed Air’s then-chief accounting officer, William Stiehl. Separately, Stiehl agreed to pay a penalty of $51,000 and to a suspension from appearing or practicing before the SEC, with a right to reapply for reinstatement after two years (In the Matter of William G. Stiehl, CPARelease No. 92539In the Matter of Ernst & Young LLPNo. 92540, August 2, 2021).

"Auditor independence is not merely an obstacle to overcome, it is the bedrock foundation that supports the integrity, transparency, and reliability of financial reporting," said the head of the the SEC Enforcement Division's FCPA Unit, Charles Cain, in a news release. "Auditor independence requires auditors to analyze all of the relevant facts and circumstances from the perspective of the reasonable investor. EY and its partners lost sight of this fundamental principle in their pursuit of a new client."

Although not named specifically in the SEC’s orders, Sealed Air, which manufactures Bubble Wrap and other packaging materials, had publicly announced Stiehl’s termination in a news release and Form 8-K filing on June 20, 2019. Sealed Air currently faces a shareholder suit in the Southern District of New York over the alleged "bid-rigging scheme" in the auditor selection process.

The SEC's order against EY found that the firm, partner James Herring, CPA, and former partners, James Young, CPA and Curt Fochtmann, CPA improperly interfered with the process established by Select Air’s audit committee to select an independent auditor for fiscal year 2015. Among other things, the order found that Stiehl provided EY, through Herring, with competing firms’ proposals and submissions, the details of each competitive bid, and all of the internal documents prepared for the audit committee, often before the audit committee itself received them. Stiehl also gave EY an "open invitation" to provide "suggestions or comments" to

RFP materials summarizing each competitors’ proposals that were going to the audit committee, the Commission found.

The SEC's order finds that EY, Herring, Young, and Fochtmann violated the auditor independence provisions of the federal securities laws and that EY, Herring, and Young caused Sealed Air to violate its obligation to have its financial statements audited by independent public accountants. The order also finds that all respondents engaged in improper professional conduct within the meaning of Rule 102(e) of the SEC's Rules of Practice.

In addition to the $10 million civil penalty, EY agreed to a series of undertakings for the next two years, including annual reviews of the internal policies and procedures adopted to enhance the firm’s ability to comply with the independence, conflict of interest, ethics and integrity requirements under applicable SEC rules and PCAOB standards concerning RFPs. Herring, Young, and Fochtmann agreed to pay civil money penalties of $50,000, $25,000, and $15,000, respectively, and to be suspended from appearing or practicing before the SEC, with a right to reapply for reinstatement after three, two, and one years, respectively.

The releases are No. 92539 (Stiehl) and No. 92540 (Ernst & Young).

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