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SEC Orders Ernst & Young, Robert Brehl, Pamela Hartford, and Michael Kamienski to Pay Over $4.4 Million in Penalties Relating To Improper Professional Conduct Between Auditors and Clients

On September 19, 2016, the SEC filed an Order Instituting Public Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order against Ernst & Young, Robert J. Brehl, CPA (“Brehl”), Pamela J. Hartford, CPA (“Hartford”), and Michael T. Kamienski, CPA (“Kamienski”) (the “Ernst & Young Order”).  The Ernst & Young Order was one of the first two enforcement actions ever filed by the SEC for auditor independence failures due to improper personal relationships between auditors and their clients’ employees.

Brehl served as Chief Accounting Officer of one of Ernst & Young’s public company clients (the “Issuer”) from January 2006 through July 2014, and is a certified public accountant (“CPA”) who resides in Kentucky.  Hartford initially served as the engagement partner and then as the coordinating partner on the Ernst & Young engagement team that provided audit and review services to the Issuer (the “Engagement Team”) until her termination on July 7, 2014.  Kamienski served as the coordinating partner on the Engagement Team from 2009 to 2013.  Beginning in December 2013, he also served as Ernst & Young’s Global Real Estate, Hospitality & Construction Assurance Leader, and then, in July 2014, as Ernst & Young’s Central Region Assurance Real Estate Market Segment Leader until his resignation in April 18, 2016.

According to the Ernst & Young Order, between March 2012 and June 2014, Hartford and Brehl “maintained a close personal and romantic relationship.”  Specifically, “[t]heir relationship was marked by a high level of personal intimacy, affection and friendship, near daily communications about personal and romantic matters (as well as work-related matters), and the occasional exchange of gifts of minimal value on holidays such as Valentine’s Day and birthdays.”  Further, from early 2013 through June 2014, Kamienski “was aware of facts suggesting a possible romantic relationship between Hartford and Brehl” and “should have identified those facts as red flags but did not” and failed to “raise concerns internally to [Ernst & Young’s] U.S. Independence group.”  During this time, Ernst & Young continued to maintain that it was an independent auditor on the Issuer’s financial statements and filings with the SEC.

The Ernst & Young Order found that Hartford violated Rule 2-01(b) of Regulation S-X, requiring independence from the Issuer.  Specifically, the Ernst & Young Order found that “[a] reasonable investor with knowledge of all relevant facts and circumstances concerning Hartford’s personal relationship with Brehl would conclude that Hartford was not capable of exercising objective and impartial judgment with respect to the audits of the Issuer.”  The Ernst & Young Order also found that Hartford caused Ernst & Young to violate Rule 2-02(b)(1) of Regulation S-X, requiring that accountants’ reports were made in accordance with Public Company Accounting Oversight Board (“PCAOB”) standards.  The Ernst & Young Order further found that Hartford and Ernst & Young caused the Issuer to violate Section 13(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 13a-1 thereunder, which require public issuers to file annual independently audited reports with the SEC.  The Ernst & Young Order also found that Brehl “caused and willfully aided and abetted the Issuer’s violation of Section 13(a) [of the Exchange Act] and Rule 13a-1 thereunder” and that Ernst & Young, Hartford and Kamienski engaged in improper professional conduct, warranting appropriate censure under Rules 102(e)(1)(ii),(iii)  and (iv) of the SEC’s Rules of Practice, and Section 4C(b)(2) of the Exchange Act.

The Ernst & Young Order directed that: (1) Ernst & young cease and desist from committing or causing any violations and any future violations of Rule 2-02(b)(1) of Regulation S-X, Section 13(a) of the Exchange Act, and Rule 13a-1 thereunder; (2) Hartford cease and desist from committing or causing any violations and any future violations of Rule 2-02(b)(1) of Regulation S-X, Section 13(a) of the Exchange Act, and Rule 13a-1 thereunder; (3) Brehl cease and desist from committing or causing any violations and any future violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder; (4) Ernst & Young be censured; (5) Hartford, Kamienski, and Brehl be denied the privilege of appearing or practicing as accountants before the SEC for a period of three (3) years; (6) Ernst & Young pay disgorgement of $3,168,500 in audit fees, prejudgment interest of $198,151, and a civil money penalty of $1,000,000; and (7) Hartford and Brehl each pay a civil money penalty of $25,000.

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