Risk Update

EY Ethics & Conflicts News — Details on Another Big 4 Accounting Conflicts Story Surface, Audit Ethics Irony

Officials Balked at a Drug Company’s Tax Shelter. Auditors Approved It Anyway.” —

  • “Court documents show the potential conflicts of interest when accounting firms simultaneously help clients avoid taxes and audit their finances.”
  • “Consultants at the giant advisory firm EY had devised an elaborate arrangement that would allow Perrigo, one of the country’s leading makers of nonprescription drugs, to avoid more than $100 million in federal taxes. But the company’s outside auditors, at the accounting firm BDO, were questioning the setup’s propriety.”
  • “At least one EY official, too, expressed concern that the tax shelter his colleagues had designed was overly aggressive. Even so, auditors at EY, also known as Ernst & Young, eventually blessed the transactions, which federal authorities now claim were shams, according to previously unreported documents made public in a court case last year.”
  • “Even so, auditors at EY, also known as Ernst & Young, eventually blessed the transactions, which federal authorities now claim were shams, according to previously unreported documents made public in a court case last year.”
  • “Internal EY emails and memos — made public last year in a court case in which the I.R.S. is challenging Perrigo’s tax arrangements and accusing EY of constructing “an abusive tax dodge” — provide a rare inside look at the potential conflicts of interest that arise as a single firm constructs tax shelters and simultaneously audits its own work.”
  • “‘When you are a consultant, you are partnering with management. You are trying to make management look really good,’ said Lynn Turner, a former chief accountant at the Securities and Exchange Commission. ‘That’s not the role of an independent auditor.'”
  • “While conflicts of interest among accounting firms have troubled investors for decades, there are signs that the conduct of the Big 4 firms is receiving new regulatory scrutiny.”
  • “Nowhere is the tension over accounting firms’ multifaceted roles more pronounced than in the lucrative business of advising companies on how to slice their tax bills.”
  • “The Big 4 accounting firms — EY, KPMG, PwC and Deloitte — have emerged as perhaps the most powerful private-sector force in U.S. tax policy. They lobby federal officials to tweak tax rules to help their clients. A steady stream of lawyers from the firms rotate in and out of senior tax positions in the Treasury Department, where they write rules favorable to their former clients.”
  • “At the same time, the Big 4 firms help companies move profits out of the reach of the U.S. government. Then the companies’ auditors — often a different group of employees from the same firm that created the structures in the first place — have to sign off on the setups. In assessing their legitimacy and the effect on the client’s financial results, the auditors frequently consult with the colleagues who devised the tax strategies.”
  • “The I.R.S. is taking a dim view of these transactions.”

The Big 4’s Tax Problem” —

  • “How Perrigo’s tax shelter worked: In 2005, EY devised a plan to help Perrigo, then based in Allegan, Mich., avoid U.S. taxes on its popular anti-heartburn medication, omeprazole. If Perrigo had bought omeprazole from a manufacturer and then sold the pills to customers in the U.S., its profits would have been taxed there. Instead, EY advised Perrigo to set up a subsidiary in Israel, with no employees and no offices, to buy the omeprazole. The shell company then sold the pills to Perrigo in the U.S. at a profit. That meant that Perrigo’s income on the pills largely remained in Israel rather than in the U.S., out of reach of the I.R.S. And because of the vagaries of Israeli tax law, the profits weren’t taxed in Israel, either.”
  • “The I.R.S. eventually questioned the transactions and required Perrigo to pay $163 million in back taxes. In a related case, Justice Department lawyers representing the I.R.S. accused EY of enabling a “shell game” and a “flagrant tax scheme gone awry.” The fight went to a federal trial last year. The judge hasn’t announced a verdict yet.”

Ernst & Young to Pay $100 Million Fine After Auditors Cheated on Ethics Exams” —

  • “Ernst & Young, one of the world’s largest auditing firms, has agreed to pay a $100 million fine after U.S. securities regulators found that some of its auditors had cheated on ethics exams — and that the firm did not do enough to stop the practice.”
  • “The penalty is the largest ever imposed by the Securities and Exchange Commission against an auditing firm. An administrative civil order filed by regulators said Ernst — also known as EY — had misled investigators, withheld evidence and violated public accounting rules designed to maintain the integrity of the profession.”
  • “‘It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams, of all things,’ said Gurbir S. Grewal, the commission’s director of enforcement, in announcing the settlement Tuesday.”
  • “The penalty is twice the sum that KPMG, another big audit firm, paid in 2019 to resolve an investigation into similar allegations of cheating by auditors on internal training exams.”
  • “Ernst, which admitted in the order that its conduct was wrong, said in a statement that ‘nothing is more important than our integrity and our ethics.’ The firm also said that ‘sharing answers on any assessment or exam is a violation of our Code of Conduct and is not tolerated’ and said it would take efforts to enforce compliance with ethical rules.”