Risk Management

EY Runs Afoul of Auditor-Independence Rules Again

After losing a client because of auditor-independence violations, Ernst & Young settles SEC charges that it lobbied Congress for another audit client.
David KatzJuly 15, 2014

Just four days after a client fired Ernst & Young for auditor-independence violations stemming from an “improper relationship” between an E&Y auditor and a client finance executive, the Securities and Exchange Commission yesterday charged the Big Four firm with breaking independence rules by improperly lobbying on behalf of two audit clients.

United_States_Capitol_-_west_frontWithout admitting or denying the charges, EY reached a $4 million settlement of with the SEC. The commission’s auditor independence rules require audit firms to maintain their objectivity and impartiality in their relationships with clients.

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The SEC found that members of an E&Y subsidiary, Washington Council EY (WCEY), lobbied congressional staff on behalf of two audit clients. “Such lobbying activities were impermissible under the SEC’s auditor independence rules because they put the firm in the position of being an advocate for those audit clients,” according to an SEC press release.

E&Y’s website notes that “WCEY’s professionals have held senior policy positions in the Executive Branch, the Senate and the House of Representatives. Partners and principals have held senior policy positions in the government’s executive and legislative branches.”

The violations detailed in the SEC’s complaint happened before 2009. In one instance, the EY lobbying unit learned about an upcoming vote in the U.S. House of
Representatives. WCEY told one of the audit clients about the vote and got a letter supporting passage of the bill from a top executive at the client addressed to House leaders.

“Just a few hours before the scheduled vote, WCEY e-mailed the letter to staff in various congressional offices. In the e-mail, WCEY congratulated the congressional staff on bringing the bill to the floor and noted that the attached letter encouraged immediate passage of the bill,” according to the SEC complaint.

In another example, the EY lobbying unit asked congressional staffers to insert a provision favorable to that client into a bill.

For the other client, WCEY tried “to persuade congressional offices to withdraw their support for legislation detrimental to that client’s business interests,” according to the SEC complaint.

Despite providing such services, EY “repeatedly represented that it was
‘independent’ in audit reports” on the financial statements of the two clients,” the commission stated.

Asked to comment on the settlement, EY provided this statement: “Auditor independence is of paramount importance to EY.  EY takes great care to ensure our services for audit clients conform to all applicable SEC and PCAOB rules. We regret these instances that arose many years ago and are pleased to put this matter behind us.  In 2012, EY voluntarily decided to cease performing lobbying work for SEC registrant audit clients.”

The SEC says that in issuing its allegation it “took into consideration the remedial acts undertaken by Ernst & Young and its cooperation with SEC staff during the investigation.”

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