Have you read the news report that the SEC fined EY in the USA $100 million for cheating on the ethics component in the CPA exams and in ethics continuing professional development courses? They reported this cheating has been going on since 2012 and EY lied to the regulators during their investigation.

I found this news report very disturbing on many levels. It reminded me of what happened with Enron some 20 years earlier. Enron produced fictitious financial statements. They received a clean audit opinion from Arthur Andersen, one of the leading firms of professional accountants. As a result, not only did Enron go out of business, but Arthur Andersen also went out of business.

Just a couple of years ago, the SEC fined KPMG $50 million because their staff also cheated on the ethics portion of the exams. So, we are starting to see a trend with two of the “Big Four” professional accounting firms admitting to cheating on the ethics portion of exams.

Our profession exists to protect the public interest as we provide assurance on compliance to third parties. We are expected to behave with integrity and our code of professional conduct requires us to behave ethically. Both these breaches by KPMG and EY in the USA indicate that many people in these leading firms are unwilling to comply with the code of professional conduct. This means regulators must step up their enforcement work.

I am an EY Canada alumni. I am proud of the training and experience I received during my early years in the profession. I speak about this pretty much in every training session with other members of our profession. How can leaders in a highly respected profession such as ours tolerate and hide such unethical behavior? Why can’t CPAs pass their ethics exams without cheating? What messages are we sending to them, to other CPAs, and to the public by allowing this to happen? I spent many years recruiting students from universities to join the EY Toronto office. I would never have imagined condoning this type of behavior.

What are our clients thinking about this news report? What reputation can we uphold for the firms and for our profession if such cheating continues? How will young people feel about becoming a CPA?

This is not a mistake or oversight. This is something that has been going on for years and something that firms hid from regulators. Auditing is part of our capitalistic democracy, just as the role of regulators is part of our system. If auditors are lying to regulators, how can they expect their clients not to lie to them?

It is time to clean up this mess and work on preventing such breaches in the future. What do we need to do to make this happen? Here are my thoughts:

1. Evaluate your recruits for ethics during the hiring process. You can do this by giving them scenarios that have ethical implications and see how they respond. The new people you are recruiting today will become your future leaders tomorrow. So, this is an important consideration – as important as their competence and ability to handle the client work.
2. Firms must not see ethics as an ‘optional, nice to have’ matter. They must see it as a ‘must have’ matter. Sure, we can talk about more ethics training, but if the leaders ignore ethical violations and behave unethically, you can’t expect much from the rest of the team. You want ethics to become part of the way in which you conduct your daily operating activities. No amount of training or drafting codes of conduct will help unless your leadership is committed to behaving ethically.
3. Leaders must understand the cost of making unethical choices. Yes, the $100 million fine hurts the firm’s pocketbook. But the real cost of making unethical choices is that you wipe out your reputation. That reputation took many decades of hard work to achieve. You lose the trust you earned from your clients and the marketplace. Warren Buffett once said, ‘It takes 20 years to build a reputation and five minutes to ruin it.”  Once you lose your reputation, it will impact every aspect of your business – your ability to recruit the top talent, your ability to attract new clients and your ability to get along and be respected by other stakeholders. The net result is that you bottom line will start to dwindle pretty quickly.
4. It will take years to clean up the organization’s corporate culture. It should start with replacing the leaders. This is how they deal with scandals in some parts of the world. The leaders must take responsibility and take the blame. Such action will tell the rank and file that there are serious consequences to ethics violations. McDonalds in the USA fired their CEO for code of conduct violations, our profession needs to take similar strong action. Just talking ethics is meaningless – we need to walk the ethics.
5. This wrongdoing is a direct violation of our profession’s code of conduct. Each regulatory body within the CPA profession must take strong action to enforce the code of conduct. We have enough problems with many regulatory bodies across the globe challenging auditor independence and determining whether there is value in an audit opinion. This is the last thing our profession needs.
6. Others within the profession, in the remaining Big 4 and in other smaller firms, must consider the ethical risks in their own organizations. Did KPMG and EY ignore any red flags? How can other firms be proactive in preventing such scandals and fines? In my ethics courses, we speak about performing an ethics risk analysis. I think all professional accounting firms will benefit from doing this.

If we ignore this situation, things will get worse, not better. More professional accountants will assume that ethics doesn’t matter, and the level of wrongdoing will likely increase. Others will lower their expectations of the profession and assume that we will behave unethically. We know from our own life experiences that problems must be solved and not hidden. Many years ago, the U.S. subprime mortgages triggered a massive recession, leading to loss and unemployment. Some of that suffering could have been prevented, had people stood up and dealt with the toxic lending. Similarly, if we ignore any problems, the problems will grow and eventually lead to major crises.