[The following information applies to the questions displayed below.] Per SEC release, from 2012 through 2014 then EY partner Pamela Hartford violated Independence Rules by having an affair with a client. Reports state she engaged in a personal relationship with Robert Brehl, the chief accounting officer of a public company that she serviced as a member of the audit engagement team. Another EY partner Michael Kamienski (the supervising partner on this engagement) became aware of facts suggesting an improper relationship between Hartford and Brehl. However, he failed to follow up on his suspicions. While Hartford and Brehl tried to keep their relationship a secret, they did attend client and EY social events. This suggests that others at both EY and the client could have been aware of the affair. As part of the first SEC enforcement action of its kind, the SEC made charges of a breach of Independence against EY, Hartford, and Kaminski as well as Brehl. All parties agreed to settle the matter with the SEC without admitting guilt. EY agreed to pay $4.366 million, and both Hartford and Brehl each agreed to pay the SEC $25,000. While Kamienski did not have to pay a fine, Hartford, Brehl, and himself were suspended from appearing and practicing before the SEC as accountants, including not participating in either the financial reporting or auditing of publicly traded companies. The suspension allowed Brehl to apply for reinstatement after one year and both Hartford and Kamienski after 3 years. The SEC release states that EY did not have specific policies in place to inquire about personal relations with clients and client personnel. EY subsequently added specific language to engagement team members’ certifications on the firm’s audit work asking about their own possible relationships with client personnel and whether they are aware of any personal relationships that any other member of the engagement team might have with client personnel. The EY engagement team member certification added the following language subsequent to the settlement of this and another SEC investigation: a. I am not aware of any other EY audit engagement team member who is or has been in such a relationship with any relevant individual of the audit client or a close or immediate family member of such a relevant individual. b. I have not frequently entertained any relevant individual of the audit client and I am not aware of any other EY audit engagement team member who has frequently entertained any relevant individual of the audit client. c. I have not frequently entertained immediate or close family members of a relevant individual of the audit client and I am not aware of any other EY audit engagement team member who has frequently entertained immediate or close family members of a relevant individual of the audit client. d. I have not stayed at a residence of a relevant individual of the audit client and I am not aware of any other EY audit engagement team member who has stayed at a residence of a relevant individual of the audit client. e. I am not aware of any other EY audit engagement team member that shares housing with a relevant individual of the audit client. f. I have not vacationed with any relevant individuals (or in the case of Partners, Principals, Executive Directors and Directors who are covered persons, any employee) of [Company] or their close family members and I am not aware of any other EY audit engagement team member that has vacationed with any relevant individuals (or in the case of Partners, Principals, Executive Directors and Directors who are covered persons, any employee) of [Company] or their close family members. g. I have not gone on a trip or attended an event with any relevant individual of [Company] where the trip or event required non-local travel or overnight accommodations and the predominant purpose of the trip or event was social, leisure or entertainment in nature, and I am not aware of any other EY audit engagement team member that has done so. Question Explain the type of threat(s) to independence this case represents and explain why it is a threat to independence.
[The following information applies to the questions displayed below.]
Per SEC release, from 2012 through 2014 then EY partner Pamela Hartford violated Independence Rules by having an affair with a client. Reports state she engaged in a personal relationship with Robert Brehl, the chief accounting officer of a public company that she serviced as a member of the audit engagement team. Another EY partner Michael Kamienski (the supervising partner on this engagement) became aware of facts suggesting an improper relationship between Hartford and Brehl. However, he failed to follow up on his suspicions. While Hartford and Brehl tried to keep their relationship a secret, they did attend client and EY social events. This suggests that others at both EY and the client could have been aware of the affair.
As part of the first SEC enforcement action of its kind, the SEC made charges of a breach of Independence against EY, Hartford, and Kaminski as well as Brehl. All parties agreed to settle the matter with the SEC without admitting guilt. EY agreed to pay $4.366 million, and both Hartford and Brehl each agreed to pay the SEC $25,000. While Kamienski did not have to pay a fine, Hartford, Brehl, and himself were suspended from appearing and practicing before the SEC as accountants, including not participating in either the financial reporting or auditing of publicly traded companies. The suspension allowed Brehl to apply for reinstatement after one year and both Hartford and Kamienski after 3 years.
The SEC release states that EY did not have specific policies in place to inquire about personal relations with clients and client personnel. EY subsequently added specific language to engagement team members’ certifications on the firm’s audit work asking about their own possible relationships with client personnel and whether they are aware of any personal relationships that any other member of the engagement team might have with client personnel.
The EY engagement team member certification added the following language subsequent to the settlement of this and another SEC investigation:
a. I am not aware of any other EY audit engagement team member who is or has been in such a relationship with any relevant individual of the audit client or a close or immediate family member of such a relevant individual.
b. I have not frequently entertained any relevant individual of the audit client and I am not aware of any other EY audit engagement team member who has frequently entertained any relevant individual of the audit client.
c. I have not frequently entertained immediate or close family members of a relevant individual of the audit client and I am not aware of any other EY audit engagement team member who has frequently entertained immediate or close family members of a relevant individual of the audit client.
d. I have not stayed at a residence of a relevant individual of the audit client and I am not aware of any other EY audit engagement team member who has stayed at a residence of a relevant individual of the audit client.
e. I am not aware of any other EY audit engagement team member that shares housing with a relevant individual of the audit client.
f. I have not vacationed with any relevant individuals (or in the case of Partners, Principals, Executive Directors and Directors who are covered persons, any employee) of [Company] or their close family members and I am not aware of any other EY audit engagement team member that has vacationed with any relevant individuals (or in the case of Partners, Principals, Executive Directors and Directors who are covered persons, any employee) of [Company] or their close family members.
g. I have not gone on a trip or attended an event with any relevant individual of [Company] where the trip or event required non-local travel or overnight accommodations and the predominant purpose of the trip or event was social, leisure or entertainment in nature, and I am not aware of any other EY audit engagement team member that has done so.
Question
Explain the type of threat(s) to independence this case represents and explain why it is a threat to independence.
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