A Securities and Exchange Commission judge Friday barred Ernst & Young, the third-biggest U.S. accounting firm, from accepting new public company audit clients for six months because of independence violations.
Ernst & Young's business venture with audit client PeopleSoft Inc. violated SEC rules that are designed to prevent conflicts of interest in audits, SEC Chief Judge Brenda Murray said in a 69-page ruling in Washington. Murray also ordered Ernst & Young to pay $1.7 million and demanded a monitor to oversee the firm's compliance.
"To miss out on picking up new SEC audit clients for six months is going to have an impact on the profitability of this firm," said Lynn Turner, a former SEC chief accountant. "When your reputation is tarred in public, companies tend to stay away from you."
New York-based Ernst & Young also has come under scrutiny for its audits of HealthSouth Corp., Time Warner Inc. and Cendant Corp. In July, Ernst agreed to pay $15 million to settle an Internal Revenue Service investigation into the firm's sale of tax shelters.
Ernst & Young said it would not appeal the judge's order.
"Independence is the cornerstone of our practice and our obligation to the public," said Ernst's public relations director, Charlie Perkins, in an e-mail statement.
The firm said the six-month bar "will not impair our ability to continue to serve our existing public company audit clients, accept new audit work from privately held companies or to accept non-audit work for public companies we do not audit."
The judge said Ernst showed little regard for following independence guidelines.
"This was not a situation of an isolated mistake or confusion over a complicated technical issue," Murray wrote. "These violations occurred over an extended period."
Murray ordered the firm to give up the $1.7 million -- its fees for auditing PeopleSoft from 1994 to 1997 -- to deter Ernst and other firms from committing similar violations.
PeopleSoft is not part of the case, and Ernst is no longer the company's auditor. PeopleSoft spokeswoman Alissa Bushnell declined to comment.
The SEC's conflict-of-interest case against Ernst & Young stems from a 1994 agreement between the accounting firm and PeopleSoft, a Pleasanton, Calif.-based software company, to license software for a tax program developed by Ernst.