Monday, April 9, 2018

Corrupt relationships between Ernst & Young and their clients (2016)

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One of the Ernst & Young Office Builidngs 
Ernst & Young(also known as the Big Four) is a multinational professional accounting firm headquartered in London, England. Companies like, Ernst & Young, often have close relationships with their clients, but for the first time the United States regulators have made a decision to take action on relationships that have gotten too close. Ernst & Young was fined $9.3 million dollars for having inappropriate relationships with clients, one which was romantic. United States regulators, more specifically the SEC, conducted investigations and found that the senior partner of EY to have forged an improperly close relationship with the company’s CFO, by spending more than $100,000 on “corporate” entertainment for the executive when working with this New-York based client. The SEC stated that EY failed to take appropriate action in this situation. Furthermore, another partner on the same team, who was working with a different public company, was romantically involved with the client’s chief accounting officer. Again, the SEC said that EY failed to take proper action in resolving the lack of independence.
A business affair can be defined as any action taken that relates to the overall company and making it better. Business affairs include going out to dinner to discuss company plans, traveling for training, and legal and professional fees. On the other hand, a personal affair doesn’t pertain to one’s work, but is done solely for an individual based on their own needs. Personal affairs include taking vacations, paying for medical expenses (that weren’t caused at work), paying for ones living expenses, etc. Personal and business affairs can be tricky as the line may be gray at times. In the case of Ernst & Young, what first started off as a business affair quickly turned into a personal matter.
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Bernard often went golfing with his client for "business" reasons 
            According to the SEC, Gregory Bernard, the partner in EY Chicago, got too close to the CFO of one of their audit client’s after being given the task of improving the firm’s relationship with the company due to their “troubled account. The regulator said that Bernard showered more than $100,000 in entertainment spending for the executive and his son, which included the treatment of sporting events and other personal gifts. To make matters worse, they stayed overnight at each other’s homes on several occasions and traveled together with family without a business purpose. Even the client noticed that Bernard was spending a lot of money on him, but Bernard just brushed it off. That being said, between January 2012 and 2015 hundreds of personal text messages, emails, and voicemails were exchanged throughout the audit period causing the firm to pay a $4.975m fine. Bernard had to pay a $45,000 penalty and was suspended to do accounting practice for three years. In the second scenario, the SEC found that the EY partner, Pamela Hartford maintained a romantic relationship with her client Robert Brehl, the Ventas executive. Hartford’s executive was aware of the situation, but failed to complete reasonable examination or raise concern, resulting in another $4.366m fine, $25,000 in penalties, and suspensions of practicing accounting for a few years from the three individuals involved.
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SEC performs checks on auditors to make sure the are independent 
The Securities and Exchange Commission creates checks on auditors to determine “whether an auditor is independent in light of investments by auditors or their family members in audit clients, employment relationships between auditors or their family members and audit clients, and the scope of services provided by audit firms to their audit clients” (U.S. Securities and Exchange). Having this independence check in place allows the SEC to determine that the accounting firm, particularly auditors, are not falsifying or messing with the books in order to help their clients or gain more money illegally from the client by doing so.  On the topic of disclosing relationships between auditors and their clients, the independence board says “Processes the audit firm uses to ensure complete disclosure of all relationships with the company and its affiliates”. This means that any relationship should be disclosed to the SEC, especially if it’s material, such as in Ernst & Young.       Stakeholders:
            The stakeholders affected in this scenario are the clients, the company employees, the firm itself, and the public. Current clients of Ernst & Young who relied on the firm are most likely now questioning the firm’s reliability and honesty. The company employees are affected by this situation because not all of the employees were involved in inappropriate relationships with their clients, but now the integrity of their work is questioned. The company is a stakeholder as they had to pay a fine for failing to take appropriate action when inappropriate relationships between employees and the clients were taking place. The public is considered a stakeholder in this scenario as the credibility of Ernst &Young is now in question due to the lack of independence with the firm.
Friedman’s economic theory, individualism is defined as the moral stance, political philosophy, ideology, or social outlook that emphasizes the moral worth of an individual. People who are considered individualists tend to value self-reliance and independence. Clearly there was a lack of independence in this situation, therefore Friedman’s individualism for the firm is jeopardized as others around are questioning the reliance and moral stance of Ernst &Young.                                                   Kantianism:
  Kantianism is the belief that no actions should be performed immorally, no matter what “benefit” it may seem to bring. DesJardins states that Kantianism is the ethical duty “to treat people with respect, to treat them as equally capable of living an autonomous life” (page 38). This means allowing and helping others make rational decisions, respecting people’s individual needs and differences. As Heather describes Kantianism “don’t lie, cheat, manipulate, or harm others to get your way. Rather use informed and rational consent from all parties” (page 17).  The close and inappropriate relationships the several employees had were opposite of what Kantianism believes. The employees of Ernst & Young were considered to be lying about having independence among their clientele, since informed and rational consent was not used when it was necessary. The SEC requires that auditors inform all client relationships to the audit committee, especially if it was personal.
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Did the employees at Ernst & Young spend money to benefit
the overall majority of their company?
The ethical philosophy of Utilitarianism can be defined as the idea that the actions that are performed are right if they are useful or benefit the majority. Furthermore, in this philosophy the action is believed to be morally right if its consequences lead to an absence of pain or happiness and wrong if it does lead to pain or unhappiness. This being said Utilitarianism focuses on maximizing the happiness and pleasure of others and for yourself. However, according to this philosophy, it is believed that hiding the truth is okay as long as it benefits the overall majority. (page 30 of DesJardins). According to the Ernst & Young situation, the happiness of the employee and the client who the relationship was maximized with the extravagant “business” spending. However, the benefits of the overall majority were not maximized, since the falsification of financial statements were at a higher risk, as well as possible carelessness of auditing with the increased trust between the client and firm.                                                                   Virtue Theory:
The virtue theory is the focus of the act itself and how it is unethical, which includes four characteristics: justice, courage, honesty, and temperance. Justice in this case was not used because they employees involved in the inappropriate relationships jeopardized the relationships of their other clients, as well as the credibility of the other employees. Honesty was also not present when the company (as stated earlier) failed to report and take action of the inappropriate relationships.
Work Cited

The Case Manual, by Heather Salazar

An introduction to business ethics by Joseph, DesJardins

1 comment:

  1. This is a very interesting case. It is amazing how such high level management that should be upholding leadership qualities can exhibit such drastic inappropriate behavior. This case is particularly interesting because it involved a partner at Ernst & Young, a public accounting firm, which is a service business that should be highly in line with ethical practices due to the nature of its work.