Introduction to the Case
Businesses and other organizations often find themselves in situations where decisions could violate ethical standards. Management must ensure that decisions comply with the companies’ and universal moral codes. Ethical decision-making entails evaluating and selecting decision alternatives consistent with ethical principles. In other words, alternatives with unethical implications are eliminated, and the best ethical alternative is chosen.
However, some situations involve decisions where all alternatives violate ethical standards. Such scenarios comprise ethical dilemmas, where decision-makers opt for the greatest good or lesser evil. Ernst & Young recently found themselves in the limelight due to exam cheating. An ethical analysis of Ernst and Young will highlight the case facts, dilemma, decision-makers, approaches to ethical decision-making, and final recommendations.
Case Facts
Ernst & Young (henceforth, EY) has made recent news headlines with its exam cheating scandal. EY, one of the largest accounting firms globally, was fined $100 million by the Securities and Exchange Commission (SEC) after dozens of its audit personnel cheated on an ethics exam (Rushe, 2022). The fine is considered the largest in SEC history since no other firm had paid similar amounts. For instance, KPMG received only a $50 million fine in 2019 for a similar ethics exam cheating (Leonard, 2022). Auditors must uphold high ethical standards, which raises concerns as several firms have been found to cheat on ethics exams or mislead investigators regarding such practices.
EY is among the accounting firms with a long history in the industry. Two brothers named Alwin and Theodore Ernst established Ernst and Ernst in 1903 in Cleveland, Ohio. In 1906, Arthur Young, a Scottish accountant who had emigrated to Chicago, founded Arthur Young & Company. The two firms merged in 1989 to become Ernst & Young, LLP (Hutcheon, 2022). By then, the two firms had witnessed massive growth to become part of the so-called Big Eights accounting companies in the United States. Since the merger, Ernst & Young has expanded beyond the American borders.
A Bloomberg report in 2022 revealed that EY considered separating its global audit and advisory practices. The reason for such a move was that tighter ethics regulations held back the growth of the company’s audit practice. Therefore, it can be observed that ethical challenges for EY began even before the exam cheating scandal. Indeed, the firm was previously fined $10 million to settle allegations by the SEC that EY violated auditor independence rules to win a business from a rival (Hutcheon, 2022). EY and its partners then became the subject of SEC investigations after a whistleblower revealed exam cheating practices and misleading investigators.
The SEC investigation revealed several facts regarding the exam cheating case. EY had received an internal tip regarding cheating in certain ethics exams. However, the firm failed to disclose the issue to the investigators. Later, regulators and EY officials investigated and discovered a widespread cheating scandal (Goldstein, 2022). The SEC probe indicated that 49 EY auditors got the “answer key” to an ethics exam, a starting point for becoming a certified public accountant (Goldstein, 2022). In other cases, hundreds of staff members were found to have cheated on ethics exams that were part of a continuing education program. SEC established that cheating incidents took place between 2017 and 2021.
All along, the accounting firm had failed to address the cheating misconduct. A significant number of EY employees did not cheat on the exams themselves. However, the investigation revealed that these workers knew their colleagues were cheating or facilitating the misconduct (Buchwald, 2022). Failure to report their colleagues meant these employees violated the company’s Code of Conduct.
Cases of exam cheating are familiar to the company since previous cases have been reported. Between 2012 and 2015, an estimated 200 EY auditors were found to have exploited a software flow in the company’s CPE testing platform (Buchwald, 2022). The flaw allowed them to pass exams by answering only a few questions correctly. The SEC established that the company took disciplinary measures towards those found guilty and has since repeatedly warned its audit staff to refrain from cheating in exams.
The two cases indicate that the company approached similar incidents differently. Even with the recent cheating scandal, EY insists that there is nothing more important to it than ethics and integrity. EY also promised to have taken an extensive, thorough, and effective response to the cheating behavior but failed to make further comments.
Therefore, the case involves a company that is aware of exam cheating practices. These acts are unethical but can be blamed on those who participated in the problem. However, this does not mean the company’s officials or management are excused:
- The firm knew of the cheating problem but failed to take action against it. As such, the company becomes complicit by failing to take the relevant measures.
- EY failed to report the cheating to the SEC, making the officials culpable.
- And perhaps most importantly, EY lied to SEC about cheating on the exam.
As a result, the company bears the ethical burden of the cheating scandal.
Decision-Maker
The decision-maker in the ethics case is the “Company,” meaning the individuals tasked with administering and regulating CPA exams and reporting incidents of exam cheating to the SEC. The first decision is failing to report the cheating to the SEC Board, a major requirement for accounting firms in the country. The second, and perhaps the most critical decision, is lying to the SEC board after an inquiry.
Due to its checkered cheating history, the SEC’s Division of Enforcement sent a formal request to EY asking if the firm had received whistleblower or ethics complaints regarding cheating. The inquiry came immediately after KPMG’s $50 million fine due to a similar incident. EY withheld the information from the SEC despite several cases of cheating being reported immediately after the inquiry. EY decided to report the problem nine months later after it had understood the true extent of the problem and believed it had a credible plan to resolve the issue.
The decision-maker faced several conflicting demands that had to be accommodated. First, the company may have yet to be fully aware of the extent to which exam cheating occurred. Therefore, reporting to the SEC that cheating was observed could have had a more significant detriment to the company than deserved. In other words, the company may have hoped the issue was minor and could be handled internally without the SEC. The second conflicting demand is that the company needed to develop a good response since more cheating cases could damage the company’s reputation. Lastly, the company needed a better plan to address cheating and created a plan before responding to the SEC.
Initial Ethical Dilemma
The initial ethical dilemma faced by the decision-maker was the consequences of admitting or failing to admit to cheating within the firm. Both alternatives had negative ethical implications, and the firm was forced to choose a less challenging one. However, the firm needed to understand the implications fully. If EY admitted that there were cheating cases, it would have been seen as admitting to being complicit in the scandal, especially since it had not reported or taken measures to prevent cheating.
Additionally, making the admission at a time when the SEC was conducting cheating investigations could see EY face similar fines to KPMG. The alternative decision was to withhold the information later, which was unethical. However, the company estimated it would take time to conduct a full investigation to establish the extent of exam cheating. Then, it would report later when the SEC was not conducting investigations and after it had developed an effective plan. In this case, the company needed to understand the legal consequences of this alternative.
Approaches to Ethical Decision-Making
Several approaches to ethical decision-making can be used to analyze EY’s cheating case. The facts of the case have been presented, which allows its examination to be undertaken from a moral perspective. The first approach is utilitarianism, which is associated with philosophers such as John Stuart and Jeremy Bentham. The practical approach posits that ethical decisions or actions provide the greatest balance between good and evil. Therefore, ethical decision-making requires three steps:
- Identify alternative actions.
- Assess the benefits and harms of each alternative.
- Select the ethical action that provides the greatest good to the greatest number.
EY arguably followed a similar approach and determined that withholding information from the SEC would allow it to take appropriate measures. However, the people affected by the decisions include the employees, clients, and the company. The company chose itself (including the employees) over the clients, meaning it prefers profitability to ethical behavior.
Kantian approach to ethical decision-making requires consideration of inviolable moral imperatives. Immanuel Kant argued that the most important aspect of ethical decision-making is respecting the dignity and freedom of rational beings. EY failed to respect its dignity and that of the SEC by lying about exam cheating. Additionally, it failed to do what was right no matter the consequence, as required under Kantian ethics. EY could have faced fines by the SEC due to cheating, but it still needed to act ethically and respond truthfully to the SEC inquiry.
The rights approach is also related to Immanuel Kant and is focused on the individuals’ right to choose for themselves. In this case, the focus is on various rights, including the right to the truth, privacy, not to be injured, and the right to what is agreed. SEC had the right to a truthful response since it was decided that accounting firms must report cases of cheating. Lastly, the distributive justice approach considers fairness. As such, the fundamental question when considering an ethical decision is how fair an act is. Favoritism and discrimination are rejected under the distributive justice approach since they unjustifiably gift benefits to some and impose burdens on others. EY’s decision to lie and fail to act on cheating cases allowed some staff members an undue benefit over those who did not cheat.
Final Recommendation
The initial ethical dilemma involved whether or not to admit exam cheating upon the SEC inquiry. Considering that the inquiry came after KPMG was fined $50 million, EY needed to consider the real implications of the decision. The final recommendation is that EY should never have lied to the SEC. In other words, the firm should have acknowledged that it had received internal tips regarding exam cheating and was working to uncover the culprits and the extent of the problem. With such a decision, the company should have demonstrated to the SEC that it was keen to maintain ethical standards.
The recommendation can be justified by considering the potential and actual consequences of the decision. First, KPMG received a $50 million fine due to a similar cheating case. Therefore, EY could have faced a similar or smaller fine. Instead, EY got a $100 million fine, presumably because the SEC considered exam cheating and lying to the SEC regarding the same. Reporting cheating later would imply that the company lied in the inquiry. The decision that EY made demonstrated that it was keen to hide or mask the problem.
The second justification is that with KPMG already taking the headline, EY may have escaped the publicity, especially if it faced a smaller fine than that of KPMG. If EY was worried about its image, the KPMG scandal was the best place to hide. Lastly, the recommended decision would have demonstrated that EY was committed to stopping exam cheating. In such a case, a full investigation by the SEC may have been avoided by showing that EY was taking full responsibility.
Reference List
Buchwald, E. (2022) EY agrees to pay $100 million fine to settle SEC investigation into ethics exam cheating. Web.
Goldstein, M. (2022). Ernst & Young to pay $100 million fine after auditors cheated on ethics exams. Web.
Hutcheon, P. (2022) Who are you? Auditor or consultant, and nonetheless cheating on exams. Web.
Leonard, C. (2022) Ernst & Young cheating scandal: The ‘largest fine ever imposed’ against audit company. Web.
Rushe, D. (2022) Ernst & Young pays $100m to settle US charges of cheating on ethics exams. Web.