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Sanctions sought for Ernst & Young

Ernst & Young, one of the world’s largest auditing firms, faces a six-month ban from taking on new public company auditing clients following a Securities and Exchange Commission investigation.

The SEC, the chief US financial regulator, has asked an executive judge for the temporary ban and other sanctions against E&Y to remedy claims that the firm compromised its independence with respect to one of its clients, PeopleSoft, the software maker.

Ernst & Young has denied the SEC’s claims, and called its recommendations “irresponsible”. The judge is not likely to rule on the case for months.

Nonetheless, the severity of the proposed penalties reflect the SEC’s effort to stop abuses in an accounting industry that has featured prominently in corporate scandals at Enron and other US companies. The SEC has requested the temporary auditing ban only a few times in the last 20 years.

The SEC ruled out an outright ban on audits at E&Y out of fear that it would unfairly punish the firm’s corporate clients, observers say.

Such a measure might also have jeopardized the firm’s existence. The US accounting sector has already been pared from five to four large firms with the dissolution of Andersen.

The SEC accused E&Y of compromising its independence as PeopleSoft’s auditor by entering into two side arrangements with the software maker.

In one case, E&Y sold a PeopleSoft software program used to calculate taxes for overseas employees. In another, E&Y installed PeopleSoft’s products for corporate customers, according to the SEC. That arrangement netted E&Y $452m in fees from 1995 to 1999.

In addition to the ban, the SEC is also seeking the disgorgement of $1.7m in auditing fees from E&Y and the appointment of an independent officer to review the firm’s auditing independence. The requests, filed with the court last week, were first reported by The Washington Post.

E&Y said it was “confident that the firm in no way violated the independence rules and there is no basis for the imposition of any sanctions of any sort against the Firm.”

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