The Securities and Exchange Commission (SEC) has issued Wells notices to three auditors from Big Four firm Ernst & Young. The notices advise the auditors that they are likely to be the subject of civil charges by the federal agency and give them an opportunity to explain their actions in an effort to show why they should not be so charged.
The possible charges stem from an audit of CUC International, a company that merged with HFS Inc. in 1997 to form Cedant, which owns Avis Rent a Car, and the hotel chains of Days Inn and Ramada. The SEC contends that CUC artificially inflated its earnings before the merger, with the blessing of its Ernst & Young auditors.
The auditors receiving the Wells notices are Marc Rabinowitz, Ken Wilchfort, and Simon Wood. Other individual E&Y auditors are facing a criminal investigation over the CUC audit. It is not certain whether the auditors who received the Wells notices are also targets of the criminal investigation. An E&Y spokesman indicated that the firm as a whole has been assured in writing that no criminal charges will be brought against those auditors. "We have alleged and we still believe that we were the victims of collusive fraud on the part of management," the spokesman said, referring to the management of CUC.
The Wells notices and the possible charges that may result from this investigation are yet another message from the SEC that accountants and accounting firms are expected to take responsibility when the management of audited companies uses tactics that defraud investors.