Ernst & Young

SEC Violations

August 5, 2008 the SEC cited the firm for "engaging in improper professional conduct." The firm agreed to pay $2.9 million to settle claims that it compromised its independence while auditing three (unnamed) firms. In an apparent conflict of interest, Mark Thompson, a board member for three E&Y clients, also earned an income coaching E&Y partners to conduct talk show-style interviews for a series of recorded interviews with industry leaders. The issue was first raised in 2004, when Best Buy announced plans to drop E&Y as its auditor after learning that Thompson, a member of its audit committee, was separately engaged with the firm. (See David Scheer and Ian Katz, "SEC Sanctions Ernst & Young," Financial Post, 8/06/2008).

May 29, 2008: SEC filed an insider trading case against James E. Gansman, an E&Y partner in the firm's Transaction Advisory Services department. According to the SEC, Gansman identified at least seven different acquisition targets of clients who sought valuation services from the accounting firm for his friend, investment banker Donna Murdoch, who traded off the information.

July 19, 2007 E&Y paid $725,000 to settle administrative charges brought by the SEC with relation to the firm's audit of SmartForce's 1999, 2000 and 2001 financial statements, when the company overstated net income and revenues in some periods, and understated them in others. (SmartForce merged with SkillSoft in September 2002; Dennis O'Hogan, a partner in the firm's Ireland office, was the client engagement partner on the account. He stopped working for SEC registrants in 2005.)

March 26, 2007 the SEC settled charges against E&Y of violations of auditor independence related to the PNC Financial Services Group's transfer of certain volatile financial assets to a special purpose entity ("SPE"), thereby removing them from their financial statements. AIG engaged one of E&Y's national office partners to assist it in developing an accounting driven financial product (aka a Contributed Guaranteed Alternative Investment Trust security or "C-GAITS"), which it sold to PNC and marketed to several other public companies. E&Y, in turn, advised PNC on the accounting treatment for each transaction. The SEC found that "[a]s a result of the activities of the National Office partner, E&Y was invested both financially and reputationally in the success of the C-GAITS product and therefore had a conflict of interest when it evaluated the accounting for that product for its audit client PNC." E&Y agreed to disgorge over $1,587,000 (including interest).

May 16, 2006 The Financial Times reported that Paul Ostling, the firm's chief operating office ordered an internal inquiry into the firm's publication of a controversial report on bad debts held by China's big four state banks that was published ahead of an overseas listing. The firm retracted the report, calling it "factually erroneous." (Richard McGregor and Barney Jopson, "E&Y staff face probe into China loans report," F Times, 5/16/2006).

August 16, 2004 AccountingWeb.Com reported that E&Y's chairman Nick Land wrote to John Vickers of the UK Office of Fair Trading to put the office on notice that the firm's potential liability exceeds its insurance coverage. Land indicated that the firm could collapse if a claim against it by Equitable Life were successful.

April 16, 2004 A SEC administrative law judge fined E&Y $2.164 million (including $1.7 million disgorgement) and bars the firm from accepting any new clients in the U.S. for six months, after finding that the firm acted improperly by auditing PeopleSoft Inc. -- a company with which it had a profitable business relationship. The relationship violated rules on auditor independence. According to The New York Times, the administrative law judge said the firm "committed repeated violations of its auditor independence standards by conduct that was reckless, highly unreasonable and negligent." (Floyd Norris, "Big Auditing Firm Gets 6-Month Ban on New Business," April 17, 2004) A former chief accountant at the SEC -- Edmund Coulson, was the Ernst partner in charge of independence issues at the firm, which he joined in 1991. The Washington Post reports that regulators estimated that during 1998 and 1999, when E&Y earned $150 million by installing PeopleSoft programs, it earned less than $ 1 million in annual audit fees. (David Hilzenrath and Kathleen Day, "Ernst & Young's Ties to Client Improper, SEC Says," May 21, 2002). The SEC alleged that E&Y violated the auditor independence requirements in connection with E&Y's audits of PeopleSoft Inc.'s financial statements from 1994 through 2000. The SEC's Office of Chief Accountant and Division of Enforcement allege that, while E&Y was serving as PeopleSoft's auditor, E&Y and PeopleSoft jointly developed and marketed a software product called "EY/GEMS for PeopleSoft," which incorporated certain components of PeopleSoft's proprietary source code into software previously developed and marketed by E&Y's tax department.

The PeopleSoft case also drew attention to Robert K. Herdman, chief accountant at the SEC, who was once vice chairman of Ernst & Young, in charge of "professional practice." According to the Wall St. Journal, "SEC inquiries into at least four Ernst & Young audit clients involve activities that occurred under Mr. Herman's watch." (Michael Schroeder and Scot J. Paltrow, "SEC Charges Ernst & Young Mixed Audits and Deal Making," WSJ) Herdman was hired by SEC chair Harvey Pitt, who represented Ernst & Young as a private attorney before his SEC appointment. The SEC stated that neither Pitt nor Herdman had anything to do with the PeopleSoft case.

September 25, 2003: The SEC charged E&Y partner Oliver Flanagan for "violat(ing) professional auditing standards governing the creation and retention of working papers as well as those establishing the standards for ethical conduct by auditors in association with "NextCard," an Internet-based credit card business.

June 27, 2002: SEC fined Moret Ernst & Young (Netherlands) $400,000. Moret "audited the 1995, 1996, and 1997 financial statements of a major client at a time when consultants affiliated with Moret had joint business relationships with the same client that impaired Moret's independence as auditor."

1999 Ernst agreed to pay $335 million to Çendant investors to settle a civil class-action suit alleging that it aided in a fraud. Ernst denied any wrongdoing.