TIAA-CREF’s Governance Under Fire

A nonauditing unit of the pension fund's auditor, Ernst & Young, had a business relationship with a company owned, in part, by two of TIAA-CREF's t...
Stephen TaubDecember 7, 2004

The Teachers Insurance and Annuity Association-College Retirement Equities Fund is one of the largest private pension systems in the world, and it has long raised corporate governance and ethical issues at some of the nation’s largest corporations. But now TIAA-CREF finds itself being questioned about a business relationship involving its outside auditor and two just-departed trustees.

About four months ago, Ernst & Young LLP informed TIAA-CREF and the Securities and Exchange Commission that a nonauditing unit of Ernst & Young had a business relationship with a company owned, in part, by two of the pension fund’s trustees, in violation of SEC auditor-independence standards, according to CBS MarketWatch. The venture has since been terminated, according to the report.

Late last week TIAA-CREF announced the resignations of the two individuals, Stephen Ross and William Waltrip, effective November 30. The Wall Street Journal reported that the SEC’s enforcement division has opened an inquiry into the events surrounding the violation, citing people familiar with the matter.

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The Journal reported that TIAA-CREF chairman and chief executive officer Herbert M. Allison Jr. knew about the independence violation in August, when Ernst & Young first notified the fund, but until last week he had told only one of the six other members of its board of overseers about the matter.

“This is an unacceptable conflict,” said Mercer Bullard, founder of shareholder group Fund Democracy, according to CBS MarketWatch. “I’m a TIAA-CREF shareholder, and I’d like to see a full accounting of what they knew and when. Those board members should have been off the board the moment they entered into serious negotiations with Ernst & Young.”

“It does show a stunning lack of judgment on the part of the directors and on the part of Ernst & Young,” Nell Minow, founder of the Corporate Library, told the website. “In this environment, it’s really astonishing to think that someone wouldn’t understand immediately that this wouldn’t be a massive perception problem, if not a substantive problem. I would hope the board of TIAA-CREF would convene an independent committee to look at systemic problems and whether they need to improve their internal controls.”

TIAA-CREF reportedly stated in its regulatory filing that the two individuals were “not aware that this business relationship raised an issue under the SEC’s auditor independence standards,” and Ross and Waltrip “resigned to ensure there would be no question regarding the independence of the auditor.”

The Journal also reported that SEC chief accountant Donald Nicolaisen told TIAA-CREF that Ernst & Young would be permitted to complete the pension fund’s 2004 audit but that he would be very upset if it were rehired for 2005.

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