Risk Management and Crisis Response Blog

SEC Agrees to $11.8 Million Settlement with Auditor for Alleged Audit Failures

Nov 18, 2016 2 MIN READ
Lauren Harper

Associate, Disputes, Toronto

Lawrence E. Ritchie

Partner, Disputes, Toronto

In October 2016, the U.S. Security and Exchange Commission (“SEC”) announced Ernst & Young LLP agreed to pay $11.8 million to settle SEC allegations related to failed audits at oil services company Weatherford International PLC. Three weeks prior to the agreement with the audit firm, Weatherford paid a $140 million fine to settle claims in which it was alleged that Weatherford used deceptive income tax accounting to inflate its earnings by over $900 million.

The SEC alleged that despite placing the Weatherford audit in the highest risk category, the audit firm failed to uncover the fraud for more than four years. They also alleged that the audit team had discovered emails with suspicious adjustments, but relied on Weatherford’s unsubstantiated explanations without taking effective measures to minimize the risk of known problems.

The $11.8 million settlement consisted of $10.8 in disgorgements and interest and a $1 million fine. While the firm consented to the order, it did not admit or deny the findings that it engaged in improper conduct during the Weatherford audits. The SEC also settled with certain of the audit firm’s partners who were part of the Weatherford audit team. The partners both agreed to suspensions for disregarding significant red flags and failing to perform audit procedures that likely would have uncovered the fraud, but did not admit to improper conduct.

This was the SEC’s third settlement with a major audit firm for allegations involving audit failure in the past year. The SEC settled with Grant Thorton LLP over charges for ignoring auditing red flags and fraud risks while auditing companies that were facing SEC enforcement and with BDO USA for allegations they failed to follow up on suspicious circumstances. Prior to these cases, the SEC had not brought charges for audit failure against a national audit firm since 2009.

In Canada, it is rare that auditors are subject to capital markets regulatory scrutiny. Most recently, in 2014, a major audit firm agreed to pay $8 million to settle Ontario Securities Commission (“OSC”) allegations related to its audits for Sino-Forest Corp. and Zungui Haixi Corp. The Ontario Securities Commission alleged the firm failed to undertake their audit with a “sufficient level of professional skepticism.” The firm admitted no wrongdoing, but agreed to an $8 million settlement which was an unprecedented amount for an auditor.

The increased regulatory enforcement against auditors in the U.S. suggests Canadian auditors should also be alive to the risks of regulatory proceedings, as well as civil liability as the Livent case heads to the Supreme Court of Canada. We will continue to monitor these issues in both Canada and the U.S.