UP TO CODE

This is a regular column in Contingencies. Written mainly by members of the Actuarial Board for Counseling and Discipline, "Up to Code" articles reflect the wide variety of issues that are brought to the ABCD’s attention during the request for guidance and complaint processes. 

November/December 2022

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A FINE MESS 

April Choi  

 

One morning in late June, while I was going through my daily routine of having my morning cup of coffee and scanning the news, something caught my eye. I came across a news article from the Wall Street Journal with the headline, “Ernst & Young Fined $100 Million in Ethics Exam-Cheating Probe.” My curiosity was piqued. After reading the article, my first reaction was “Wow!” followed by a sense of relief that the matter did not involve actuaries.

When I Googled “E&Y $100 million fine,” I found that this news had received wide coverage and was reported by multiple national and local news media, including Bloomberg, CBS, USA Today, CNN, and The New York Times. So, what was this flabbergasting news all about? According to the SEC press release,[1] “The Securities and Exchange Commission today charged Ernst & Young LLP (EY) for cheating by its audit professionals on exams required to obtain and maintain Certified Public Accountant (CPA) licenses, and for withholding evidence of this misconduct from the SEC’s Enforcement Division during the Division’s investigation of the matter. EY admits the facts underlying the SEC’s charges and agrees to pay a $100 million penalty and undertake extensive remedial measures to fix the firm’s ethical issues.” Apparently, this cheating had gone on over multiple years.[2] According to the settlement order, in the years from 2012 to 2015, more than 200 EY employees rigged their scores on continuing education exams by exploiting a flaw in testing software. These audit professionals were subsequently disciplined by the company. Despite repeated warnings from EY to its employees that such misconduct could result in disciplinary action, including termination, cheating went on in 2016 and 2017. And the latest finding in 2019 was that 91 professionals in multiple offices had either used the answer keys received from colleagues to pass ethics exams and/or sent answer keys to others.

Additional news articles reported that other accounting firms had also been caught and fined for exam cheating. In 2019, KPMG was fined $50 million; in addition to altering past audit work papers to reduce its high rate of audit deficiency findings, audit professionals had cheated on internal training exams by improperly sharing answers and manipulating the passing scores.[3] As recently as February 2022, PWC Canada was fined $900,000 by regulators in both Canada and the U.S. over exam cheating involving 1,100 auditors.[4] Again, employees were improperly sharing answers on internal training tests. All of these examples illustrate how pervasive the problem of exam cheating is.

In the EY case, many of the professionals who acknowledged that they had violated EY’s Code of Conduct said they did so because they had failed to previously pass the training exams multiple times or because of time constraints due to extensive work commitment.

The SEC findings also noted that a significant number of professionals knew of their colleagues’ cheating but did not report them. Those individuals had also violated EY’s Code of Conduct because they were obliged to report unethical conduct of which they were aware.

While this news is “interesting” reading, it serves as a cautionary reminder to all professionals—including actuaries—that such behavior reflects badly on the profession’s integrity and ethical standards. It is not just the gigantic fines that are punitive. Even more detrimental is the damage done to the reputation of the company, of the profession, and of oneself. As SEC Enforcement Director Gurbir Grewal said in the E&Y case, “This action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our Nation’s public companies. It is simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things.”

Because I serve as a member of the Actuarial Board for Counseling and Discilpine (ABCD), it was natural for me to picture how the ABCD would assess this case if similar complaints against members in any of the five actuarial organizations[5] were brought to the board. It is likely that complaints involving exam cheating or false reporting of continuing education credits would allege that the accused actuary had violated Precept 1 of the Code of Professional Conduct. See, for reference:

Precept 1—An Actuary shall act honestly, with integrity and competence, and in a manner to fulfill the profession’s responsibility to the public and to uphold the reputation of the actuarial profession.

 

and

ANNOTATION 1-4. An Actuary shall not engage in any professional conduct involving dishonesty, fraud, deceit, or misrepresentation or commit any act that reflects adversely on the actuarial profession.

Members who are aware of the cheating but fail to report it would violate Precept 13 of the Code:

Precept 13—An Actuary with knowledge of an apparent, unresolved, material violation of the Code by another Actuary should consider discussing the situation with the other Actuary and attempt to resolve the apparent violation. If such discussion is not attempted or is not successful, the Actuary shall disclose such violation to the appropriate counseling and discipline body of the profession, except where the disclosure would be contrary to Law or would divulge Confidential Information.

Complaints against the members would be vetted by the ABCD and, if found credible, could result in recommendations for appropriate disciplinary actions to these organizations.

For actuarial candidates who are not yet members of the actuarial organizations, the Society of Actuaries (SOA) and the Casualty Actuarial Society (CAS) have codes of conduct that candidates agree to follow. These include:

RULE 1: An Actuarial Candidate shall act honestly, with integrity and competence, to uphold the reputation of the actuarial profession.

RULE 2: An Actuarial Candidate shall not engage in any professional conduct involving dishonesty, fraud, deceit, or misrepresentation or commit any act that reflects adversely on the actuarial profession.

Candidates who commit a material violation of the provisions of the applicable Candidate Code are subject to the discipline procedures of these two organizations (the ABCD does not handle purported violations of  the codes of conduct for candidates). Cheating on exams or falsifying the number of exams passed on one’s resume for a job application or to remain in a company’s student program are violations of the Candidate Code of Conduct and would be subject to discipline. (The latter violations are often found when either a potential employer or current employer contacts the actuarial organizations to verify the number of exams a candidate has passed.)

In talking to Stuart Klugman, a senior staff fellow of the SOA Education Team, I learned more about the SOA’s “Policies and Procedures for Disciplinary Action Related to Education, Examinations and e-Learning,” which are applicable to both members and non-members of the SOA. Because the examination and education process is a critical component of the candidates’ career, the actuarial organizations enforce these policies and procedures to ensure high standards of conduct. If it is found that a candidate has cheated or failed to follow the Exam Rules and Regulations or the SOA Terms and Conditions Agreement for e-Learning Candidates, the candidate will be disqualified from the examination and potentially be prohibited from participating in any examinations for a period of time.

The good news is that exam cheating offenses are rare. This result can be attributed to implementation of exam processes that prevent cheating, such as administering exams in individual cubicles so that candidates are unable to copy from their neighbors, having in-person proctoring and video monitoring of exam progress, inspecting candidates’ personal belongings before admitting them to the exam room, and verifying IDs. (Even during the peak period of COVID-19, the SOA continued in-person exam proctoring.) In the case of e-learning, plagiarism can be more easily detected via software programs. Individuals who may not be a candidate or a SOA member can submit an infraction report to the SOA, describing how a candidate might have violated the exam or e-learning rules or the codes of conduct.

There are situations other than exam cheating in which we must be mindful of preserving our professional integrity. The ABCD conducts inquiries into alleged violations of the Code of Professional Conduct that damage the reputation of the actuarial profession. For example, in 2021,[6] some of the alleged violations of Precept 1 included: improperly disclosing confidential client information, submitting and certifying incorrect medical claim costs, and providing actuarial services to a principal when the actuary had reason to believe such services may be used to violate or evade federal law. There was also an alleged violation of Precept 13 for failure to report actuaries whose actions appear to have materially violated the Code.

U.S. actuaries have always taken pride in being a self-regulated profession. In order to exemplify our professionalism and preserve our self-regulation status, each of us as individuals must uphold and abide by our Code of Professional Conduct, follow the actuarial standards of practice (ASOPs), and comply with the U.S. Qualification Standards.

When I was faced with “gray areas” situations at work and not sure what I should do, I would pause and think about what the right thing is to do. Many times, there was a faint whisper in my ear advising me about what was right and what was wrong. And, in the E&Y case, I thought of what Warren Buffett once said: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

APRIL CHOI, MAAA, FSA, is a member of the Actuarial Board for Counseling and Discipline.

[1] https://www.sec.gov/news/press-release/2022-114

[2] https://www.sec.gov/litigation/admin/2022/34-95167.pdf

[3] https://www.sec.gov/news/press-release/2019-95

[4] https://www.ft.com/content/2e246b48-a6a9-4dc6-b4fb-136b62ab3a3a

[5] The participating organizations are the American Academy of Actuaries, the American Society of Enrolled Actuaries, the Casualty Actuarial Society, the Conference of Consulting Actuaries, and the Society of Actuaries.

[6] From 2021 ABCD Annual Report.