Supplier cheats on ethics exam

Can you trust a supplier that cheats on an ethics exam...?

News broke on the 28^th of June that EY agreed to pay a $100 million penalty after the US Securities and Exchange Commission (SEC) found that 49 EY employees sent or received answer keys to a Chartered Public Accountant (CPA) ethics exam between 2017 and 2021.

The SEC said further that "hundreds of other audit professionals" at EY cheated on professional courses and exams, "including those addressing CPAs' ethical obligations." They noted that many other EY employees were aware of the cheating, but did not report it, breaching company codes of conduct.

“This action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our Nation’s public companies. 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, Director of the SEC’s Enforcement Division. “And it’s equally shocking that Ernst & Young hindered our investigation of this misconduct. This action should serve as a clear message that the SEC will not tolerate integrity failures by independent auditors who choose the easier wrong over the harder right.”

Whilst the SEC has strong words on EY’s behaviour, let’s look into the fine bit more. The SEC’s fine was $100m but EY’s global revenue for 2021 was $40 billion and for the US it was $17.7 billion. so whilst a $100m is a big number, at 0.6% of revenue for the US office it’s is relatively a small slap on the wrist. We question whether a fine of 0.6% of revenue will actually change an organizations behaviour?

Probably more importantly is what does this finding and the associated press coverage, do for the damaging clients' trust of their supplier.

Organizations must be asking themselves questions like:

1. How do we trust an organization who is supposed to be checking and ensuring organizations don’t cheat are cheating themselves (unbelievably on ethics exams)?
2. Do we want to be associated with a supplier or organization which hindered their governing bodies investigation?
3. Does this supplier or organization have an endemic issue of cheating and being above the rules?
4. If a supplier or organization cheats on something like this, what else do they cheat on and can we trust them on our account?
5. Does the supplier’s or organization’s employees have the same values or moral code as we expect from our own employees?
   

From the SEC filing we see that this isn’t an isolated incident. Cheating happened over a 4 year period with a significant number of EY audit professionals cheating on the ethics component of CPA exams and continuing professional education courses required to maintain CPA licenses. Including courses designed to ensure that accountants can properly evaluate whether clients’ financial statements comply with Generally Accepted Accounting Principles.

EY are not alone in poor ethical behaviour, in 2019, KPMG agreed a $50 million settlement after it was found to have used stolen data to alter already completed audits after being tipped off that it was about to be inspected.

We note the reference to trust by the SEC. From our annual global research and 18+ years of supporting clients Supplier Management programmes we know that one of the key ingredients for a good supplier relationship is trust. When we measure the strength of a customer-supplier relationship we use two elements ‘Trust attributes’ and ‘Control attributes’.

Trust attributes are grouped into:

• Commitment
• Predictability
• Mutuality
• Transparency
• Compatibility

Let’s take compatibility - The question has to be asked, how many organizations are there that see themselves being compatible with an organization that cheats or steals?

Or transparency, how do you trust an organization when they knowingly hide their cheating? EY now admit “that during the Enforcement Division’s investigation of potential cheating at the firm, EY made a submission conveying to the Division that EY did not have current issues with cheating when, in fact, the firm had been informed of potential cheating on a CPA ethics exam. EY also admits that it did not correct its submission even after it launched an internal investigation into cheating on CPA ethics and other exams and confirmed there had been cheating, and even after its senior lawyers discussed the matter with members of the firm’s senior management. And as the Order finds, EY did not cooperate in the SEC’s investigation regarding its materially misleading submission”.

We see trust time and time again as a key factor in why a supplier relationship is going well or conversely a lack or a breach of trust sees that supplier relationship falter. We’ve written previously about the challenges of managing professional services suppliers, in particular the ‘big 4’ audit firms. Within the article we mention a few techniques you can use to manage these suppliers better. For example:

• Run a 360° review of the relationship
• Create a joint account plan where both parties understand goals and targets of each other
• Map the stakeholders and relationship organisational chart including defining clear roles and responsibilities within the relationship
• Developing a governance model for the relationship including escalation paths for risks and issues
• Introduce a structured and rigorous performance management regime
• Develop a relationship charter which defines acceptable behaviours
• Use SupplierBase to manage the relationship in a structured and consistent way
• Train both internal stakeholders and the supplier on what a good relationship looks like and what acceptable behaviours are