U.S. says Ernst & Young to pay $11.8 million to settle audit charges

Ernst & Young will pay $11.8 million to settle charges over "failed audits" of oil services company Weatherford International Plc , 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 said.

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 said.

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)