Auditor Penalized for Consulting, Auditing at PeopleSoft

Ernst & Young ordered to pay $2 million for violating the SEC's auditor independence rules due to its consulting and software licensing relationship with PeopleSoft.

The U.S. Securities and Exchange Commission has sanctioned Big Four accounting firm Ernst & Young LLP, saying it had an improper business relationship with enterprise software maker PeopleSoft Inc.

The commission on Friday issued a decision that bars E&Y from accepting new audit clients for six months, requires the firm to hire an independent advisor to review its own rules on maintaining auditor independence and orders E&Y to stop violating specified SEC rules around auditor independence.

E&Y also was ordered to turn over to the commission nearly $1.7 million it received from PeopleSoft for audit services, plus an additional $729,000 in interest.

Between 1994 and 1999 while auditing PeopleSofts books, E&Y earned $425 million in consulting fees for implementing PeopleSoft applications, the SEC reported. At the same time, E&Y developed and sold an application called E&Y/GEMS (Global Expatriate Management System) for PeopleSoft, which included some source code from PeopleSoft, and paid PeopleSoft a royalty for every copy it sold.

The overlap between E&Ys work as an auditor and its close business relationship with the company tarnished at least the appearance of E&Ys independence as an auditor, the SEC said. For instance, the two companies jointly marketed the E&Y implementation services, shared customer information and customer leads, endorsed each others products or services and share links to each others Web sites.

In a decision signed by Chief Administrative Law Judge Brenda P. Murray, the SEC took E&Y to task for letting its consulting business interfere with the independence of its auditing business.

"Despite EYs strong denials, the evidence shows that the firm paid only perfunctory attention to the rules on auditor independence in business dealings with a client, and that EY reliance on a culture of consulting to achieve compliance with the rules on auditor independence was a sham," the decision said.

As the result of widespread reporting of similar conflicts throughout the industry, most big accounting firms have sold off their consulting arms. E&Y sold its consulting practice to Cap Gemini Group S.A. in 2000.