Another Independence Monitoring Disclosure: PCAOB Makes Public a 2020 EY QC Criticism

On March 12, the Public Company Accounting Oversight Board released a previously nonpublic portion of Ernst & Young’s 2020 inspection report. Board criticisms of a firm’s quality control system appear in Part II of its inspection report, and, under the Sarbanes-Oxley Act, Part II is nonpublic when the report is issued. If the firm does not, in the PCAOB’s view, satisfactorily address a quality control criticism within 12 months, the Board makes the criticism public. The quality control deficiency that the Board found in its 2020 inspection of EY and has now made public is identical to a deficiency that the Board found in its 2019 and 2018 EY inspections and has previously made public.

The now-public quality control criticism in EY’s 2020 inspection report is that EY’s system of quality control did not provide reasonable assurance that EY personnel will comply with the firm’s policies and procedures concerning independence-related regulatory requirements. EY conducts periodic audits of a sample of its personnel to monitor compliance with firm independence policies. In the reviews EY conducted during the 12 months ending March 31, 2020, the firm found that 26 percent of managers who were audited had not reported financial relationships that were required to be reported under the firm’s policies. The inspection report states:

“This high rate of non-compliance with the firm’s policies, which are designed to provide compliance with applicable independence regulatory requirements, provides cause for concern, especially considering that these individuals are required to certify on a semi-annual basis that they have complied with the firm’s independence policies and procedures.”

The date of EY’s 2020 inspection report is September 30, 2021. Therefore, the PCAOB’s disclosure of this portion of the 2020 report indicates that EY failed to persuade the PCAOB that, as of September 30, 2022, it had satisfactorily remediated the deficiency related to compliance with the firm’s independence-related reporting policies.

2020 is the third inspection year for which the PCAOB has found that EY failed to remedy this deficiency. On July 11, 2024, the Board made public the same finding EY’s 2019 inspection report. See PCAOB Discloses Three 2019 Criticisms of EY’s Quality Control, July 2024 Update. On October 17, 2022, the PCAOB made public the same finding in Part II of EY’s 2018 inspection report. See PCAOB Gives EY a Partial Fail on 2018 Remediation, September-October 2022 Update. These quality control lapses relate to EY’s internal procedures, and there is no indication that they resulted in violations of the SEC’s or PCAOB’s independence rules.