New Media Quotes on EY and Tether
I've been very busy getting ready for the start of classes at Wharton on Aug. 30 but, in the meantime, fielding calls from media for a few notable quotes.
Rust Never Sleeps is an album with both studio and live tracks by Canadian American singer-songwriter Neil Young and American band Crazy Horse. Young used the phrase "rust never sleeps" as a concept for his tour with Crazy Horse to avoid artistic complacency and try more progressive, theatrical approaches to performing live.
Two new songs, the acoustic "My My, Hey Hey (Out of the Blue)" and electric "Hey Hey, My My (Into the Black)" were the centerpiece of the new material…After his final performance at the Boarding House on May 28, Young collaborated with the art punk band Devo on a cacophonous version of "Hey Hey, My My (Into the Black)" at the Different Fur studio in San Francisco and, would later introduce the song to Crazy Horse. During the Different Fur studio session, Devo vocalist Mark Mothersbaugh added the lyrics "Rust never sleeps", a slogan he remembered from his graphic arts career promoting the automobile rust proofing product Rust-Oleum.
Young adopted the line and used it in his Crazy Horse version of the song, as well as for the title of his album. The lyrics, ‘It's better to burn out than to fade away,’ were widely quoted by his peers and by critics.” From the Wikipedia entry for Rust Never Sleeps.
It may be the middle of a long hot summer here in Philadelphia, but there’s a lot going on and if, like me, you choose to stay in the game, you’ve got to keep up to stay in the game.
On June 28 the SEC charged Ernst & Young LLP (EY) for “cheating by its audit professionals on exams required to obtain and maintain Certified Public Accountant (CPA) licenses, and for withholding evidence of this misconduct from the SEC’s Enforcement Division during the Division’s investigation of the matter.”
In a rare occurrence by anyone, let alone a Big 4 audit firm, EY admitted the facts of the SEC’s charges and agreed to pay a $100 million penalty. The SEC also required the firm to “undertake extensive remedial measures to fix the firm’s ethical issues.”
There is a lot to say about this case, and a lot has already been said, but I’ll say a few more things that I think have not been emphasized enough.
First, it is incredibly depressing to see the depth and breadth of the corruption at the global audit firms over and over again. My friend and mentor at Texas A&M, Mike Shaub, wrote some sad words I was crushed to read:
How to Kill a Profession, Michael K. Shaub, June 29th, 2022
My initial response was anger. Three of the four largest firms have now been implicated in this same kind of cheating on internal exams, though EY’s cheating on ethics exams required to finalize becoming a CPA seems unique. There seems to be a long pattern, stretching back at least a decade, of EY staff exploiting software weaknesses and simply sharing answers, despite repeated documentation and warnings by management and some level of internal sanctions…I am moving past anger into sadness because I know that in some ways, I am part of two institutions that are responsible for these egregious lapses in moral integrity. The EY problem is not just a public accounting issue; many of these people were cheating on ethics exams to become CPAs. They were brand new to the profession. That means they didn’t learn to engage in this behavior from the profession; they learned it in our classrooms…
Some of us object, or push back, or try to institute tight controls to prevent it. But fewer and fewer students prove to be trustworthy, much to my chagrin, and they almost never report it when anyone else engages in dishonest behavior.
This was true at EY as well; there is a distressing lack of moral courage in our classrooms and in the profession. The SEC enforcement proceeding commented extensively on the EY professionals who knew about it and did nothing. We have normalized this pattern of moral deviance—cheat, notice, roll your eyes—and its corrosive effect on education and professionalism is rarely discussed seriously in our hallowed halls. But it is moral cowardice.
I wrote to Mike to tell him I don’t think it is failure of teachers and amazing mentors like him and so many more that have picked up the mantle of trying to lead students down the path of professionalism and public duty. I think it is the firms’ leaders, most of whom are in their 40‘s and who should have have benefited from an increased emphasis on ethics in the classroom and the firms and their clients since Enron and Sarbanes-Oxley’s passage 20 years ago.
However, students are pressured to go along and get along, to please their bosses and the companies they audit. They join the firms earlier and earlier as interns, sometimes working at one firm several times before graduating after five years with a Masters in Accounting. They come back to class each time and scoff at our “polyanna” views about what it means to be a professional and to serve the public, to choose to be a CPA as a vocation, not just a job.
I do have hope or I would not be doing trying to teach accounting to the even more challenging MBA students. But I sometimes feel like it’s all that’s left that I can do.
Second, the case got a lot of attention in the media, more than the test cheating aspect of the 2019 KPMG case got, because of the huge $100 million fine.
I commented extensively on this fine and put it in perspective on Twitter, outlining several other recent SEC fines for EY just since 2014 and the fact that the SEC and PCAOB never sanctioned or fined EY for its role in the Lehman Brothers collapse, the Luckin fraud, EY’s US activities for Wirecard, and many other cases I have reported on at EY in the last 10 years.
Then I was asked to comment on it by Amanda Iaccone for Bloomberg Law:
EY Cheating a ‘Wake-Up Call’ as SEC Targets Market Gatekeepers
Francine McKenna, who teaches financial accounting at the Wharton School of Business, sees a “pervasive disregard for the seriousness” of such training and testing among audit firm leaders—and that trickles down to staff. “There is no meaning to it. It’s something you have to get through,” she said.
Fines historically have been too low to provide any sort of meaningful deterrent, McKenna said.
“It’s not a lot of money,” she said of EY’s record-setting SEC fine. “It’s maybe high for audit firms, but that’s only because the fines for audit firms have been so piddly in the past.”
Which brings me to my third, and l;ast point for now on this case. It provides the most egregious example of the revolving door leading to regulatory capture I have seen in the 16 years I’ve been writing about the work rather than doing it.
Who are the inside and outside attorneys that the SEC said misled them? The act of misleading the SEC is the rationale for a fine in 2019 that was double KPMG’s fine for test cheating and the criminal indictment of all but the top guy in its audit leadership team for stealing regulatory data form the PCAOB. And now the SEC is requiring that “EY’s Special Review Committee shall require that the Remedial IC conduct a review (the “Remedial IC Review”) of EY’s conduct relating to the Commission staff’s June 2019 Information Request, including whether any member of EY’s executive team, General Counsel’s Office, compliance staff, or other EY employees contributed to the firm’s failure to correct its misleading submission.”
The Chief Legal Officer for EY US is Michael Solender. However, more interesting to me is who counseled EY from the outside on this matter.
Would make a really great Daily Show-type segment to put the public statements Ceresney made in 2014, 2016, and then Avakian made about KPMG in 2018-2019 and when she asked EY if it had same the stealing and cheating issues side by side with Ceresney and Avakian’s colleague Schubert’s defense of EY to today’s SEC. (Not the only SEC case where Ceresney is taking advantage of his SEC past.)
No wonder Gurbir Grewal is disgusted.
It is also worth asking: How much worse would EY’s fine or penalty have been if Ceresney and Avakian’s Wilmer Hale colleague were not providing bipartisan excuses for EY’s actions?
Finally, I had something to say about one SEC Commissioner quoted in a WSJ article by Dave Michaels who actually drafted a long public statement to defend EY and decry the probe into its process.
Barely a week later, after working with him for a while, Jesse Drucker at The New York Times quoted me in an investigative piece he wrote about how EY developed complex tax avoidance strategies for pharmaceutical company Perrigo and then became Perrigo’s auditor when its existing auditor, BDO, would not sign off on them. EY has gone on to audit its own work ever since.
Officials Balked at a Drug Company’s Tax Shelter. Auditors Approved It Anyway - The New York Times
“The auditor is supposed to be a watchdog for shareholders. But when the audit firm designs, implements and testifies in court to defend sophisticated tax avoidance strategies for audit clients, they are providing an opinion on their own work,” said Francine McKenna, a lecturer at the Wharton School of the University of Pennsylvania and author of a widely read accounting newsletter.
“The company has paid for a lap dog, not a watchdog.”
Finally, we are still talking about Tether and the reports it pays an audit firm to produce, fully of noisy details and oaths but signifying nothing.
I am quoted by Andrew Singer in Cointelegraph:
On the other hand, Tether’s stablecoin circulation could be trending downward as a result of the crypto sector’s continued slump. If that is the case, “there will be fewer Tether in circulation and therefore less reserves needed as a result of the decline in value and volume of Bitcoin and other crypto transactions,” Francine McKenna, lecturer at the Wharton School and publisher of The Dig newsletter, told Cointelegraph.
One source suggested that a Big Four firm may not want to take on Tether as a client given its controversy and opaqueness, but “I think they would take the engagement,” commented Stark. But, if they did refuse, that in itself would be a red flag, a sign that “the company was really in trouble,” he said.
McKenna doesn’t believe that a giant accounting group would make a meaningful difference now, however. “It really does not matter which firm signs the opinion since it is not an audit but a validation of information that is based on management representations.” The accounting firm is limited to the information that Tether is sharing with it, in other words — and it doesn’t really matter under such circumstances whether the accounting firm is small or large.
John Reed Stark, the Founder and former Chief of the SEC’s Office of Internet Enforcement, is unrelenting in his criticism of crypto. He has escalated his criticism of SEC Commissioner Hester Peirce’s support for the industry since I commented on his polite overtures despite views that he strongly disagrees with.
At this point Stark’s criticism of crypto, and Peirce’s support for it in the face of so many scams and frauds, has reached fever pitch. But Stark still holds out hope that status quo solutions can solve the problem.
Today’s New York Times Opinion piece by Paul Krugman on the absence of US regulatory action in the crypto has a lot of hot takes and potential subtweets.
But I like this one, in particular:
So much more to say but I will leave it for another day.
© Francine McKenna, The Digging Company LLC, 2022
Here’s a harder version if you like this sort of thing, which I do.