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Cheater Cheater

$100 million.

That's the size of the massive fine the Securities and Exchange Commission (SEC) is imposing on professional services firm Ernst & Young (a.k.a. "EY") for cheating.

But not just any old cheating, which would be bad enough for a company that gets hired to ensure other companies aren't trying any funny business with their financial statements.

No, EY's fine is the result of hundreds of their auditors caught cheating on...

... an ethics test.

You can't make this stuff up.

According to The Washington Post: "The [SEC] found that beginning in 2017, 49 Ernst & Young professionals shared or received answers to ethics exams they needed to pass to get licensed as certified public accountants. Hundreds more cheated on courses they needed to take to maintain their standing with state oversight boards, while others who didn’t participate themselves helped facilitate the behavior."

I can't summarize the absurdity of this situation any better than Gurbir Grewal, the SEC's enforcement director, did in a statement to the media:

"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.”

If you think the SEC's accusation might be unfounded, and that EY is protesting such a terrible accusation against them, you'd be incorrect: EY admitted to the SEC’s charges in a statement and said it will accept the penalty.

But it gets even worse! Rather than immediately admit fault and assist the SEC with their investigation, EY's leadership decided to do the opposite: they chose to cover up the activity and, according to Grewal, "hindered [the SEC's] investigation of this misconduct."

Is EY going to survive CheaterGate?

Absolutely, for two reasons.

First, this isn't the first time that EY has been caught cheating. According to the SEC (via The Washington Post), "From 2012 to 2015, an internal company investigation found over 200 firm employees exploited a software glitch in the company’s testing platform to cheat on exams."

And second, in fiscal 2021, EY earned $40 billion in global revenue, which means even that "massive" $100 million fine represents just 0.25% of what they earned last year.

So "survival" isn't the problem.

The problem is that EY doesn't really sell accounting and auditing services.

They sell trust.

When EY says your financials are in order, people believe they're in order... because EY is a trusted authority.

Well, for now, anyway.

I don't know how many times a trusted authority can be caught cheating before they're no longer seen as a trusted authority, but it seems you're still okay if you're only caught twice.

When you're in the business of trust, you would think it would pay to be trustworthy.

But what do I know? I didn't earn $40 billion last year.

Perhaps I'm just too honest.


P.S. According to this website, EY currently employs over 298,000 people in more than 150 countries. Clearly, the unethical actions of a few hundred EY employees are neither reflective of everyone working at the firm today nor likely to eradicate the trust EY has earned since it was founded (via merger) in 1989.

But my broader point stands: when you're in the business of trust, you need to be trustworthy. And, unfortunately, a few bad apples can make the whole barrel appear rotten.


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