Ernst & Young was caught by surprise by the severity of the penalties imposed by a US judge on Friday. The firm had been hopeful it could escape with “a rap on the knuckles” for its dealings with PeopleSoft, people close to the accounting firm said on Sunday.

Judge Brenda Murray, an administrative law judge, said E&Y’s US business should be suspended from taking on new listed audit clients for six months.

She also ordered E&Y to pay almost $1.7m, and to “cease and desist” from violations of auditor independence rules.

E&Y, led by James Turley, global chairman, has decided not to appeal against the judge’s order which had been sought by the Securities and Exchange Commission. E&Y hopes to limit the damage to its reputation by complying in full with the order rather than embarking on further litigation.

E&Y denied breaching SEC auditor independence rules in its relationship with PeopleSoft, the US software company.

People close to E&Y said its US business had been hopeful the judge would accept its arguments and dismiss the case or at worst impose a limited fine. “This judgment came as a surprise,” said one E&Y partner. “We were at worst expecting a rap on the knuckles.”

E&Y audited PeopleSoft’s financial statements between 1994 and 1999. In 1995, E&Y entered into a partnership with PeopleSoft to install its software at companies. E&Y was paid almost $1.7m for auditing PeopleSoft’s financial statements. But E&Y’s consulting arm earned a further $425m from implementing PeopleSoft’s software at companies.

However, E&Y sold the consulting arm in 2000. Regulators launched efforts to bolster auditor independence in 2000, and further reforms were delivered by the 2002 Sarbanes Oxley legislation.

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