EY Runs Afoul of Auditor Independence Rules Thanks to Sporting Events, Office Romance

By | 8 months ago

One of the keys to being a successful partner in a large accounting firm is client management. If you’re a tax or advisory partner, this is pretty simple: you wine, you dine, you do the work with a smile on your face. The client is happy. You are a good partner.

Audit partners don’t have it quite so easy. Independence rules, as we’ve discussed many times, require audit firms to avoid any real or perceived conflict of interests. This means the wining and dining is pretty limited, gifts are frowned upon and your smiles shouldn’t be too big. This is auditing, after all; no one should be enjoying themselves.

Now, we should note that auditor independence is flawed thanks to the issuer-pay model. This requires everyone to ignore the fact that issuers pay their auditors, thereby undermining the entire premise of auditor independence. It's the biggest flaw of entire issue, however, the parties involved — auditors, clients, regulators — can't be bothered with it. Accordingly, let's all agree to forget about the absurdity of auditor independence for a little bit to to discuss a couple of SEC settlements against EY that were announced today. Good? Great.

SPORTS!

First we have the case of Gregory Bednar. He was a partner put on a “troubled account” that EY was in danger of losing. He was in charge of “developing” and “mending” EY’s relationship with this unnamed client. During this developing and mending, he got a little too friendly with the CFO and his family and the SEC order has all kinds of fun details as to how he did that. Shall we have a look see?

For starters, the Order mention that Bednar and the CFO took at least seven out-of-town trips together “all of which were social in nature and did not have a valid business purpose.” They also did the occasional sleepovers where both Bednar would be a guest of the CFO in one of his homes or vice versa. This is all documented in excruciating detail over two pages in the Order, so I’ll present a bunch of it here:

Ahhhh, yes. Nothing crosses the line into they grey area of perceived conflict quite like a good ol' sporting event.

The Masters trip in paragraph 23 came to a halt when “EY received a regulatory inquiry in March 2015 regarding Bednar’s relationship with the CFO.” The other fun part of this story is that Bednar’s spending was getting noticed by his EY superiors and they didn’t really do anything about it, despite the fact that he was throwing around way more money than his peers:

That’s such a partner thing write in an email — “the market impact.” To his credit, this partner probably didn’t want “Why is this clown spending over $25k a quarter on audit clients?” to appear in an SEC order and kept it professional. What's more, even the client asked about Bednar's spending, noticing that it was, uh, a lot:

That's just beautiful — totally ignoring a client's request to to explain $32k in partner expenses when "he has not been in too often over the last few months."

Ultimately though it was the Masters tournament that did Bednar in and it’s no wonder; the whole thing was getting a little ridiculous:

Incredibly, Senior Partner C didn’t go for it, “but thanked Bednar for his ‘continued focus on building long lasting client relationships.’“

If you've always suspected partners to spend lavishly on clients, seemingly carefree, the whole SEC order will be an enjoyable read for you.

The Ventas affair

Independence screw-up #2 you’ve already heard about. It become news last year when Ventas, a real estate investment trust, fired EY when it was made aware of an inappropriate relationship between its chief accounting officer Robert Brehl and an EY partner, Pamela Hartford.

The SEC order describes “a high level of personal intimacy, affection and friendship," between Brehl and Hartford including "near daily communications about personal and romantic matters (as well as work-related matters), and the occasional exchange of gifts of minimal value
on holidays such as Valentine’s Day and birthdays.” Yep, that's relationship material.

Naturally, Brehl and Hartford wanted to keep their relationship a secret but apparently they weren’t very good at that since:

several employees within the Issuer’s accounting and treasury departments, including lower level employees and Vice Presidents A, B and C, observed interactions between Brehl and Hartford that raised concerns in their minds about a possible inappropriate relationship between them.

The SEC order doesn't go into detail about what these "interactions" were, but anyone who's worked in an office has suspected other people of getting it on based on nothing more than casual flirting. I wonder if this is all these people basing their hunches on? Seems pretty thin.

However! In this case, their hunches were correct. When their relationship began, Hartford was an engagement partner, reporting to Michael Kamienski the “coordinating partner.” When Kamienski had to roll off due to independence rules, Hartford was a candidate to take over the coordinating partner role. This meant she would be interviewed by members of Ventas’s management including Brehl. Brehl gave her information about what sort of questions she would be asked and “advised her on persuasive responses.” Hartford won the job, in part, due to Brehl’s support.

This is pretty reckless behavior on Hartford and Brehl’s part, but the SEC found that Michael Kamienski had some responsibility too. You see, he had his suspicions about Hartford and Brehl and didn’t mind telling anyone about it:

Okay, now this is getting weird. Did Brehl tell Kamienski that he had the hots for Hartford? I mean, why else would Kamienski be such a loudmouth about it? And then go so far as to suggest that she got the job because he had the hots for her? That's a pretty inappropriate thing to discuss with colleagues if it's just your gut-feeling, isn't it? Not to mention that Kamienski even confronted Hartford about it:

At this stage, Kamienski sounds like a shameless gossip rather than a concerned professional. Rather than approaching EY brass, he's essentially harassing Hartford. Ventas personnel even approached Kamienski with their suspicions and he still did nothing. It's all very strange because once someone from Ventas made a whistleblower complaint, an investigation was launched and Brehl and Hartford's relationship was found out the next day.

EY agreed to pay $9.3 million in fines. Bednar, Hartford and Kamienski were all separated from the firm and are suspended from doing accounting firm before the SEC. 

[SEC Press Release, Order (Bednar), Order (Hartford, Kamienski), Reuters]

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