WASHINGTON (AP) — In a rare move, federal regulators are seeking to have Ernst & Young suspended from accepting new corporate clients for six months because of the big accounting firm's alleged failure to remain completely independent from companies whose books it audits.
The Securities and Exchange Commission contends in a legal proceeding that Ernst & Young's internal controls are inadequate to prevent its auditors from becoming too cozy with client companies.
In a case before an administrative law judge that began last year, the SEC alleges that Ernst & Young, the nation's third-largest accounting firm, violated rules designed to keep accountants independent from the companies they audit when it engaged in business with a software company client.
The SEC filed a brief in the case a week ago that criticized the firm's internal controls and asked that it be suspended for six months from new business with any publicly traded company. The agency has not sought a suspension of a major accounting firm since 1975.
"It seems likely that (Ernst & Young) will continue to commit independence violations in the future," the SEC said in its brief.
Spokesmen for New York-based Ernst & Young didn't immediately return a telephone call seeking comment.
The issue of auditor independence was among those at the heart of the Enron scandal, which raised questions about Enron's longtime accountant, Arthur Andersen LLP, having done both auditing and consulting work for the energy-trading company.
Andersen was convicted last June of obstruction of justice for destroying Enron audit documents.
In the administrative proceeding, the SEC said that Ernst & Young was auditing the books of business software maker PeopleSoft Inc. at the same time it was developing and marketing a software product in tandem with the company. Ernst & Young engaged in the dual activities from 1993 through 2000, according to the SEC.
The firm has said that its conduct was appropriate and conformed with accounting profession rules.
It was the second time the SEC had brought an auditor independence action against Ernst & Young, which settled a 1995 action by agreeing to comply with independence guidelines.
The firm recently has come under fresh scrutiny over its role as longtime auditor for HealthSouth, the rehabilitation services company embroiled in a $2.5 billion accounting scandal. Ernst & Young has been sued by shareholders seeking billions of dollars in damages in connection with its audits of HealthSouth and other big companies with accounting troubles, including AOL Time Warner and Cendant.