A romantic relationship and a close friendship between Ernst & Young auditors and executives with the companies they audited has cost the firm $9.3 million.
The Securities and Exchange Commission on Monday settled what it said were the first cases of personal relationships violating the commission’s rules on auditor independence and impartiality.
Former Ernst & Young auditor Pamela Hartford maintained a romantic relationship with Robert Brehl, the former chief accounting officer at Ventas Inc., a real estate investment trust, while Hartford worked on the engagement team that was auditing the trust, according to the SEC.
In a separate case, the SEC said former Ernst & Young auditor Gregory Bednar went too far when he was asked in 2012 to help improve the firm’s relationship with an unnamed New York company. Bednar, who was the senior partner on an engagement team for the client, became close friends with its chief financial officer and his family. The two socialized and stayed at each other’s homes and Bednar befriended the CFO’s son, ringing up some $100,000 in travel and entertainment expenses between 2012 and 2015, including paying for trips to see the Green Bay Packers play and the Masters golf tournament in Georgia. Ernst & Young partners knew about the spending but took no action, the SEC said.
Bednar and the CFO exchanged hundreds of personal text messages, emails and voicemails during the auditing periods.
Andrew Ceresney, director of the SEC’s Division of Enforcement, said at a news conference that auditors are “critically important gatekeepers” who play “a public watchdog function that demands total independence from the client at all times.”
Ceresney said the crackdown on personal relationships was a first, as independence rule enforcement has “usually turned on impermissible financial arrangements or transactions.”
Without admitting or denying the findings, Ernst & Young will pay $4.975 million in sanctions in the case of Bednar, who will pay a penalty of $45,000 and is suspended from appearing and practicing before the SEC or being a part of financial reporting or auditing of public companies. Bednar, 56, can apply for reinstatement after three years.
Ernst & Young will pay $4.37 million for the violation by Hartford, who will pay $25,000 and was also suspended with possible reinstatement in three years.
Brehl, 54, was fined $25,000 and was suspended but can be reinstated within one year.
The relationship between Hartford, 41, and Brehl ran from March 2012 through June 2014 and was uncovered when a vice president at Ventas made an internal whistleblower complaint.
Also suspended was Ernst & Young partner and Hartford’s supervisor on the audit, Michael Kamienski, who “became aware of facts suggesting a possible romantic relationship between Hartford and Brehl” from early 2013 on, yet failed to inquire or raise concerns internally.
“Kamienski should have identified those red flags but did not,” the SEC said.
Kamienski, 41, was suspended with possible reinstatement after three years.