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SEC Fines Ernst and Young $2.9 Million for Independence Violations
SEC Fines Ernst and Young $2.9 Million for Independence Violations
The SEC has sanctioned Ernst and Young $2.9 million for being “engaged in improper professional conduct” and in violation of several rules and acts, specifically the Exchange Act § 4C and Rule 102(e) of the Commission’s Rules of Practice. Rule 102(e) and Exchange Act Section 4C. E&Y shall pay the SEC $2.9 million, composed of disgorgement of $2.4 million and prejudgment interest of $0.5 million.
All this stems from a relationship between E&Y and Mark C. Thompson, during which Thompson was a Board of Directors member of three E&Y audit clients. The SEC did not name the three audit clients by name. E&Y and Thompson collaborated to create a series of audio CDs called The Ernst & Young Thought Leaders Series between October 2002 through early May 2004. Apparently, E&Y paid Thompson over the course of the relationship, $377,500, for co-producing seven completed CDs in five separate audiobooks, and unbeknownst to E&Y, this sum was approximately half of Thompson’s net income at the time.
As we see it, this was a business development effort by Ernst and Young to elevate itself as a thought leader and produce insightful material that would allow it to have “critical leadership issues” discussions with company CEOs which could lead to potential engagements to Ernst and Young. This is a reasonably common practice for professionals service firms to produce thought-provoking interviews or written pieces to establish themselves as thought leaders, with a view to influence key decision makers and gain strategic or tactical projects.
However, it appears that Ernst and Young did not adequately disclose this relationship to companies A, B and C. Moreover, a senior internal E&Y review concluded that this relationship would not impair its independence, and was a “ordinary course of business” matter. On the contrary, the SEC claims that E&Y was not truly independent when it issued its auditing opinion since it had this relationship with Thomson, who was on the Board of Directors of these three affected companies. Further, E&Y did not fully and adequately disclose this relationship to the companies.
By doing so, it violated its auditor independence, since as the rules explicated, “An accountant is not independent if, at any point during the audit and professional engagement period, the accounting firm or any covered person in the firm has any direct or material indirect business relationship with an audit client, or with persons associated with the audit client in a decision-making capacity, such as an audit client’s officers, directors, or substantial stockholders.”
This only highlights the fine line that public auditors have to walk when they engage in any sort of arrangement with any influential party who is connected with their audit clients. Did E&Y adequately address the risk and consequence of such relationships? Did they draw the right conclusion in that it was not an extraordinary relationship? Why should the SEC see it differently? How important is the definition of independence and necessity of disclosure? These are serious questions which perhaps should be considered at the outset, but perhaps never done, since it is not evident that seemingly innocuous events can lead to bad future consequences with regulatory authorities.
This also emphasizes the need for risk management at the highest levels of the Big Four firms of anything that lead to skirmishes with the authorities. The scrutiny of the SEC on the Big Four firms and the glare on auditor independence is just beginning to show in such cases, and likely to get more intense as the years pass. The firms have to quickly get to manage these risks in their course of business.
By piecing events together, the media gathered that Company A was Best Buy Company.
The SEC has a large amount of detail in its pronouncement of August 5, 2008 at http://www.sec.gov/litigation/admin/2008/34-58309.pdf
SEC, Fines, Ernst and Young, Auditor Independence , Mark Thomson, Best Buy, Thought Leaders
Posted by: Big4 08.06.2008 12:48 pm
The SEC has sanctioned Ernst and Young $2.9 million for being “engaged in improper professional conduct” and in violation of several rules and acts, specifically the Exchange Act § 4C and Rule 102(e) of the Commission’s Rules of Practice. Rule 102(e) and Exchange Act Section 4C. E&Y shall pay the SEC $2.9 million, composed of disgorgement of $2.4 million and prejudgment interest of $0.5 million.
All this stems from a relationship between E&Y and Mark C. Thompson, during which Thompson was a Board of Directors member of three E&Y audit clients. The SEC did not name the three audit clients by name. E&Y and Thompson collaborated to create a series of audio CDs called The Ernst & Young Thought Leaders Series between October 2002 through early May 2004. Apparently, E&Y paid Thompson over the course of the relationship, $377,500, for co-producing seven completed CDs in five separate audiobooks, and unbeknownst to E&Y, this sum was approximately half of Thompson’s net income at the time.
As we see it, this was a business development effort by Ernst and Young to elevate itself as a thought leader and produce insightful material that would allow it to have “critical leadership issues” discussions with company CEOs which could lead to potential engagements to Ernst and Young. This is a reasonably common practice for professionals service firms to produce thought-provoking interviews or written pieces to establish themselves as thought leaders, with a view to influence key decision makers and gain strategic or tactical projects.
However, it appears that Ernst and Young did not adequately disclose this relationship to companies A, B and C. Moreover, a senior internal E&Y review concluded that this relationship would not impair its independence, and was a “ordinary course of business” matter. On the contrary, the SEC claims that E&Y was not truly independent when it issued its auditing opinion since it had this relationship with Thomson, who was on the Board of Directors of these three affected companies. Further, E&Y did not fully and adequately disclose this relationship to the companies.
By doing so, it violated its auditor independence, since as the rules explicated, “An accountant is not independent if, at any point during the audit and professional engagement period, the accounting firm or any covered person in the firm has any direct or material indirect business relationship with an audit client, or with persons associated with the audit client in a decision-making capacity, such as an audit client’s officers, directors, or substantial stockholders.”
This only highlights the fine line that public auditors have to walk when they engage in any sort of arrangement with any influential party who is connected with their audit clients. Did E&Y adequately address the risk and consequence of such relationships? Did they draw the right conclusion in that it was not an extraordinary relationship? Why should the SEC see it differently? How important is the definition of independence and necessity of disclosure? These are serious questions which perhaps should be considered at the outset, but perhaps never done, since it is not evident that seemingly innocuous events can lead to bad future consequences with regulatory authorities.
This also emphasizes the need for risk management at the highest levels of the Big Four firms of anything that lead to skirmishes with the authorities. The scrutiny of the SEC on the Big Four firms and the glare on auditor independence is just beginning to show in such cases, and likely to get more intense as the years pass. The firms have to quickly get to manage these risks in their course of business.
By piecing events together, the media gathered that Company A was Best Buy Company.
The SEC has a large amount of detail in its pronouncement of August 5, 2008 at http://www.sec.gov/litigation/admin/2008/34-58309.pdf
SEC, Fines, Ernst and Young, Auditor Independence , Mark Thomson, Best Buy, Thought Leaders
Posted by: Big4 08.06.2008 12:48 pm
 Views: 385 |
 Comments: 0 |
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