Ernst & Young’s business venture with audit client PeopleSoft Inc. violated SEC rules that are designed to preserve the independence of audits, SEC Chief Judge Brenda Murray said in a ruling today. Murray also ordered Ernst & Young to pay $1.7 million and required the firm to be overseen by an independent monitor.
The firm “committed repeated violations of the auditor- independence standards by conduct that was reckless, highly unreasonable and negligent,” Murray wrote in a 69-page order. “It has not acknowledged that it has committed any violations, and it has offered no assurance that it will not commit violations in the future.”
Ernst & Young spokesman Ken Kerrigan didn’t return a call seeking comment. The firm may appeal the ruling to the SEC’s five commissioners.
Ernst & Young also has come under scrutiny for its audits of HealthSouth Corp., AOL Time Warner Inc. and Cendant Corp., which have announced the need to restate their finances. In July, Ernst agreed to pay $15 million to settle a U.S. Internal Revenue Service investigation into the firm’s sale of tax shelters.
The SEC’s conflict-of-interest case against Ernst & Young stems from a 1994 agreement between the accounting firm and PeopleSoft, a Pleasanton, California-based software company, to license software for a tax program developed by Ernst & Young. The firm agreed to pay PeopleSoft royalties of as much as 30 percent on sales of licenses, with a minimum payment of $300,000.
The software program, called “EY/GEMS for PeopleSoft,” was sold to three customers and Ernst got out of the software consulting business in 2000, according to court filings in the case.
PeopleSoft is not part of the case.
Under the Sarbanes-Oxley corporate-governance law enacted in July 2002, accounting firms are barred from performing nine types of non-audit services for clients, including information- technology consulting.