(Adds comment from Ernst & Young and details about case)
By Suzanne Barlyn
Oct 18 Ernst & Young will pay $11.8 million to
settle charges over "failed audits" of oil services company
Weatherford International Plc <WFT.N >, the U.S. Securities and
Exchange Commission said on Tuesday.
An Ernst & Young partner who coordinated the audits and a
former tax partner who was part of the audit team were also
charged in the SEC's order, the agency said in a statement.
Under the settlement, both agreed to suspensions from
working as accountants in SEC-related matters. The two
"disregarded significant red flags during the audits and
reviews," the SEC said.
The charges followed a $140 million penalty on Weatherford
announced last month to settle charges it inflated earnings in
its 2007-2010 financial statements. Weatherford, which had been
promoting its favorable tax rate to analysts, restated its
earnings in 2011.
Ernst & Young neither admitted nor denied the SEC findings.
"Audit quality is central to EY and all of our
stakeholders," said Ernst & Young spokeswoman Amy Call Well in a
statement. "Since the time of the Weatherford audits, and as
referenced in the SEC Order, EY has taken significant steps in
improving audit quality."
The SEC found that Ernst & Young classified Weatherford
audits as high-risk but repeatedly failed to detect the
company's fraud until it had continued for more than four years.
The Ernst & Young audit team knew of accounting adjustments
that Weatherford was making to significantly lower the amount it
set aside at the end of each year for income taxes, the SEC
But the auditors relied on Weatherford's "unsubstantiated
explanations" instead of performing required audit procedures to
scrutinize Weatherford's accounting, the SEC said.
Weatherford became an Ernst & Young client in 2001, quickly
gaining a reputation as a "particularly risky and difficult
client," according to the SEC settlement.
From at least 2004, Ernst & Young concluded that Weatherford
posed a "significant risk to the firm" that could be detrimental
monetarily or to its reputation. The firm designated Weatherford
as a high-risk client that would require more "detailed review"
by senior audit team members, according to the settlement.
A former Ernst & Young senior tax advisor, Sarah Adams,
questioned Weatherford's accounting practices as early as 2007,
when the company's fraud began, but signed off on various
Weatherford auditing documents, along with Craig Fronckiewicz,
the partner who coordinated the audit team, the SEC said.
Adams, for example, questioned a $439 million adjustment by
Weatherford, in 2007, but accepted its verbal explanation, the
SEC said. The two "failed to review meaningfully or substantiate
the adjustment through basic reconciliation or other audit
procedures that likely would have revealed the error," the SEC
Lawyers for Adams and Fronckiewicz could not be reached for
comment. The two neither admitted nor denied the SEC's findings.
Fronckiewicz can reapply to work on SEC-related accounting
matters after two years, while Adams can apply for reinstatement
after a year, the SEC said.
(Reporting by Susan Heavey; Editing by Mohammad Zargham, Steve
Orlofsky and Meredith Mazzilli)