SEC Wants New Client Ban At E&Y

May 30, 2003 ( - An alleged failure to maintain distance between its clients and its audits has the US Securities and Exchange Commission (SEC) calling for a six month moratorium on new clients at Ernst & Young.

The SEC pushed for the temporary ban in court papers filed as part of a case in which it accuses Ernst & Young of violating auditor independence rules by working too closely on a computer software project with PeopleSoft Inc., a client whose books it audited.   Additionally, the agency is asking the judge to order Ernst & Young to give up $1.7 million in fees according to a Reuters report.

“In this case, the evidence shows that in its relentless pursuit of profits deriving from relationships with its audit client, PeopleSoft, E&Y lost sight of, and failed to meet, the high standards for the public perception of independence,” the SEC charged in its brief filed last week.

E&Y Deny

While the court filings say the alleged violation occurred while Ernst & Young was auditing the software developer’s books from 1994 to 2000, Ernst & Young has argued that the case is moot because it sold its consulting business in May 2000.   Therefore, the nation’s fourth largest accounting firm, said it would be “irresponsible” for the SEC to bar it from taking on new clients because it allegedly violated auditor-independence rules.

“The SEC staff has no reason to seek any sanctions against Ernst & Young in the PeopleSoft matter, let alone to attempt to bar the firm from accepting new audit clients,” the New York- based accounting firm said in a statement.

SEC independence rules ban accountants from selling other services to audit clients that may pose conflicts of interest. The PeopleSoft case is the second auditor-independence case brought against the firm in recent years. Ernst & Young settled an SEC complaint in 1995 by agreeing to comply with auditor- independence standards.