Two E&Y Partners Suspended by SEC For Failure to Catch Fraud

Two Ernst & Young partners settled a civil lawsuit filed by the Securities and Exchange Commission (SEC) by agreeing to a suspension from auditing public companies for at least four years. The suit alleged that Kenneth Wilchort and Marc Rabinowitz, who both work in E&Y’s Stamford, CT office, failed to detect accounting fraud at Cendant Corporation and its predecessor, CUC International.

In 1977 CUC International merged with HFS Inc. to form Cendant, a travel and real estate provider that is also the franchiser of Jackson Hewitt, the second-largest tax service in the United States. Mr. Wilchort served as audit engagement partner for Cendant from 1990 until 1996. He was succeeded by Mr. Rabinowitz, who held the position until 1998.

"The point of the case is that even when your client lies to you, that does not excuse the fact that one fails to conduct a proper audit."

In its complaint letter, the SEC claims that between 1995 and 1998, Cendant managers devised a scheme that inflated operating income by more than $500 million. The SEC alleges that Mr. Wilchort and Mr. Rabinowitz aided and abetted these violations by approving financial statements that did not conform to generally accepted accounting principles. The SEC further alleges that the two men excessively relied on management’s representations and failed to perform independent testing even when there were "multiple, conflicting and sometimes contradictory" financial documents.

Mr. Wilchort and Mr. Rabinowitz did not pay any fine or admit any wrongdoing in conjunction with the settlement. A SEC spokesperson said that the agency’s action should serve as a message to other accountants, "The point of the case is that even when your client lies to you, that does not excuse the fact that one fails to conduct a proper audit."

In previously related action, E&Y paid $335 to settle a class-action lawsuit on behalf of Cendant shareholders. In 1999, Cendant filed a lawsuit against E&Y seeking damages incurred by the class-action lawsuit.

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