Judge Suspends E&Y for Six Months

April 16, 2004 (PLANSPONSOR.com) - Ernst & Young LLP can't take on new public companies as audit clients for six months as a result of an order by an administrative law judge in a US Securities and Exchange Commission (SEC) case involving auditor-independence issues.

The ban came after a judge found “overwhelming evidence” that Ernst’s “day-to-day operations were profit-driven and ignored considerations of auditor independence.”   Brenda Murray, chief administrative law judge at the SEC said the firm “committed repeated violations of the auditor independence standards by conduct that was reckless, highly unreasonable and negligent” as it jointly marketed consulting and tax services with audit client PeopleSoft Inc.  

She noted that Ernst had billed itself in marketing materials as an “implementation partner” of PeopleSoft and had earned $500 million over five years from installing PeopleSoft programs at other companies, which use the software to manage payroll, human resources and accounting operations, according to the NY Times.

The six-month suspension appears to match the longest suspension on signing new business ever imposed on a leading accounting firm, according to the report.

Cease Level

Judge Murray also issued a cease-and-desist order against the firm, saying it had refused to admit it had done anything wrong and that there was no reason to believe it would not violate the rules again. A fine of $1,686,500 was also imposed, the total amount of audit fees the company received from PeopleSoft during the period, plus interest of $729,302.   Murrayalso ordered that an outside monitor be brought in to assure the firm complied with the rules in the future.

The judge was also harshly critical of the Ernst partner in charge of independence issues, saying he kept no written records and had failed to learn enough facts before saying the relationships between Ernst and PeopleSoft were proper, according to the Times report. That partner, Edmund Coulson, was chief accountant of the SEC before joining Ernst in 1991.

Friday night Ernst & Young said it would accept the ruling and would not appeal. It had the right to appeal to the full S.E.C. and then to federal courts if the commission ruled against it.

PeopleSoft replaced Ernst as its auditor in 2000, after the SEC investigation had begun. It then hired Arthur Andersen and moved to KPMG in 2002 after Andersen collapsed in the wake of the Enron debacle.