E&Y to Pay $1.6M Audit-independence Fine

Big Four accounting firm allegedly helped AIG develop and market an accounting-driven financial product, then advised PNC on its accounting treatment.
Stephen Taub and Dave CookMarch 26, 2007

Ernst & Young LLP will pay nearly $1.6 million to settle civil charges that it violated auditor independence standards through its work with American International Group and PNC Financial Services Group, according to the Securities and Exchange Commission.

The Big Four accounting firm agreed to the settlement, which includes disgorgement of $1,196,700 and interest of $390,470.42, without admitting or denying the allegations.

Three years ago, the SEC imposed even tougher sanctions on the firm for alleged audit-independence violations. Ernst & Young was fined $1.7 million, plus interest, and barred from accepting new U.S. audit clients for six months.

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The current SEC complaint charged that in 2001, an Ernst & Young partner helped AIG to develop and market an accounting-driven financial product, then advised PNC on the accounting treatment for that product in PNC’s financial statements. The audit firm compromised its professional independence, the commission alleged, by not performing “a meaningful analysis” of the accounting separate from the partner’s analysis.

According to the SEC, the product enables a company to transfer volatile financial assets to a special purpose entity. In 2001, AIG sold three such products to PNC, which as a result improperly excluded certain assets from its consolidated financial statements, according to the SEC.

The commission charged that Ernst & Young advised PNC on the accounting for each transaction.

In January 2002, PNC announced that it would restate its financials for the second and third quarters of 2001, and revise its previously announced results for the fourth quarter and full year, to include the previously excluded assets.

As a result of the partner’s actions Ernst & Young “compromised its auditor independence required by generally accepted auditing standards and Regulation S-X of the commission’s rules and regulations,” the SEC alleged. According to the commission, because the audit firm was not independent in its review of PNC’s financial statements for the second and third quarters of 2001, Ernst & Young caused PNC’s violations of the reporting provisions.

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