Ernst & Young Hit With Record Penalty

Submitted by rkoreto on Thu, 02/09/2012 - 16:24

The PCAOB has imposed a $2 million civil money penalty against Ernst & Young and sanctioned four of its current and former partners for violating board rules and standards, according to a Feb. 8 statement.

The sanction is related three of the firm's audits of Medicis Pharmaceutical Corporation, and a consultation stemming from an internal E&Y audit quality review of one of the audits, said the statement, which noted that the respondents agreed to settle without admitting or denying the Board's findings.
 
The statement continues that the Board found that Ernst & Young and its partners "failed to properly evaluate a material component of the company's financial statements — its sales returns reserve." PCAOB staff questioned the firm's acceptance of the company's accounting for its sales returns reserve.
 
Ernst & Young ultimately concluded that Medicis's reserving for its sales returns was not in conformity with GAAP. The statement also noted that the company corrected its accounting for its sales returns reserve and filed restated financial statements with the SEC as a result.
 
The PCAOB has posted its full 25-page order, which contains all the technical details. But PCAOB Chairman James R. Doty summed it all up in two sentences: "These audit partners and Ernst & Young—the company's outside auditor for more than 20 years—failed to fulfill their bedrock responsibility. The auditor's job is to exercise professional skepticism in evaluating a public company's accounting and in conducting its audit to ensure that investors receive reliable information, which did not happen in this case."
 
As of Feb. 9, Ernst & Young had not posted a response in the news section of its corporate website. However, it did send a statement to media outlets. The Associated Press quoted the statement as saying: "This settlement allows us to put this matter behind us. We have implemented changes to our policies and procedures that directly address the PCAOB's concerns and will enhance quality in the future. We take these issues very seriously, and remain highly confident in the quality of our audits."
 
 
 

 

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