That EY cheat sheet shouldn’t work anymore

There’s a simple technical fix for the exam cheating that landed Ernst & Young with a $100 million fine from the Securities and Exchange Commission this week. But the problems exposed by this episode go deeper than poorly constructed online tests that were, ironically, designed to assess ethical awareness. The audit profession has an issue with fraud in its own backyard.

A significant number of EY US employees taking the ethics component of the Certified Public Accountant tests obtained the answers beforehand from 2017 to 2020, the SEC found. These were in the form of a key — say, B, D, A, C. The obvious way to prevent such cheating is by randomizing the order of the answer choices, or by giving each examinee different questions. The testers have finally caught up with this particular wheeze.

The more draconian response would be to scrap multiple-choice ethics tests altogether given good conduct should be common sense. That would be a step backwards. If such tests were so easy, people wouldn’t cheat.

In any case, the challenges extend far beyond examination protocols whether in ethics or more practical aspects of accounting. Cheating by auditor is worryingly prevalent.

In February, a US accounting watchdog fined PricewaterhouseCoopers’s Canadian partnership $750,000 for weak controls that saw more than 1,200 employees participate in “improper answer sharing” in internal tests from at least 2016 to early 2020. Rival Big Four auditor KPMG paid a $50 million penalty in 2019 after the SEC found it had used stolen information to prepare for regulatory inspections, while some of its auditors “manipulated an internal server” to lower the pass mark in training exams.

And these cheating situations may simply be the ones we know about.

As so often in corporate scandals, the institutional response is typically as bad as the misconduct itself. Many EY employees knew what was going on and didn’t report it. EY suggested to supervisors it had no issues with cheating despite receiving information to the contrary and hindered the SEC’s probe, the agency said.

For its part, EY says its remedial actions have been “thorough, extensive and effective.” Still, there’s a cultural issue here that needs to be addressed, and this is where other firms can learn lessons too. Culture comes from the top and EY’s US partnership has new leadership taking over this week. That’s a start.

However, in very large firms such as the Big Four auditors, imposing an unified culture from on high isn’t easy. What counts is having the right governance structures to ensure the organization jumps on problems as soon as they materialize and deals with regulators openly.

EY’s US partnership has a small independent committee specifically responsible for advising on things that affect audit quality — including culture. If this was effective, the SEC wouldn’t be ordering the firm to hire two outside consultants to review its ethics policies and further review EY’s disclosure failures.

That imposition points to the value of audit partnerships having a deep bench of weighty non-executives who can function as a sort of internal regulator. Obviously, EY doesn’t answer to external shareholders, but it looks like it could learn something from public-company governance.

As EY considers separating its audit and consulting businesses, the episode is a reminder that the issues in the Big Four go beyond policing conflicts of interest between those two activities. While auditing is seen as less well-paid than other financial careers early on, it can still be lucrative — so the incentives to bend rules to climb higher are there.

If EY slims into a dedicated audit firm, it will have a chance to reset its culture. Even then, it won’t be as easy as A, B, C.

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