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SEC Charges Ernst & Young Member Firm and Two Individuals with Auditing Violations and Improper Professional Conduct

Dec. 17, 2020

ADMINISTRATIVE PROCEEDING
File No. 3-20173

December 17, 2020 - The Securities and Exchange Commission today announced that accounting firm Mancera S.C., the Mexican member firm of Ernst & Young Global, agreed to settle charges of audit violations and improper professional conduct in connection with Mancera's 2010, 2011, and 2012 audits of Mexico-based homebuilding company Desarrolladora Homex S.A.B. de C.V. The SEC previously charged Homex and four of its former executives in connection with a $3.3 billion accounting fraud involving reported fake sales of more than 100,000 homes to boost revenues in the company's financial statements during the 2010-2012 period.

The engagement partner and senior manager on each of the deficient Homex audits - Alejandro Valdez Mendoza, who is no longer associated with the firm, and Angel Radames Corral Nieblas, who is a current partner at Mancera - also agreed to settle related charges of audit violations and improper professional conduct.

According to the SEC's order, Mancera's audits failed to comply with certain auditing standards. As set forth in the order, Valdez and Corral failed to adequately train and supervise audit team members in the performance of visits to Homex construction sites throughout Mexico and failed to document an inconsistency discovered during construction site visits indicating that Homex recognized revenue on homes that were not substantially constructed. The order further finds that Valdez and Corral failed to properly evaluate responses to certain bank confirmations, and failed to properly test and document journal entries in certain Homex entities to identify material misstatements due to fraud.

Mancera, Valdez, and Corral consented to the SEC's order without admitting or denying the findings and were ordered to cease-and-desist from future violations. The SEC's order finds that Mancera, Valdez, and Corral engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission's Rules of Practice. Further, the order finds that Mancera committed, and Valdez and Corral caused, violations of Section 10A(a)(1) of the Exchange Act and Rule 2-02(b)(1) of Regulation S-X, and that Mancera, Corral, and Valdez caused violations by Homex of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder.

Mancera agreed to be censured and pay $1,089,926 in disgorgement and prejudgment interest and $500,000 in civil penalties. Mancera also agreed to a comprehensive set of undertakings, including providing to Commission staff reports on the firm's quality controls and audit-and-quality-related guidance and policies, validation plans to test compliance with commission regulations and PCAOB standards and rules, and increased auditor training.

Valdez and Corral each agreed to be suspended from practicing before the SEC as an accountant, with the right to reapply for reinstatement after five years and two years, respectively.

The SEC's investigation was conducted by Benjamin D. Brutlag, Alfred C. Tierney, Andrew M. Shirley, Juan M. Migone and Richard Hong, and supervised by J. Lee Buck II. The SEC appreciates the assistance of the Mexican Comisión Nacional Bancaria y de Valores.

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