Federal regulators censured Ernst & Young LLP on Monday and ordered the accounting firm to pay $1.6 million to settle charges of compromising its independence and contributing to faulty accounting by a client in 2001.
Ernst & Young agreed to pay restitution and interest, and to be censured, in connection with its audit work for Pittsburgh-based PNC Financial Services Group, a large regional bank company. The Big Four accounting firm neither admitted nor denied the allegations by the Securities and Exchange Commission, the agency said.
It was the second time in nearly three years that the SEC sanctioned Ernst & Young for alleged violations of auditor independence rules.
In April 2004, an administrative law judge at the agency found that Ernst & Young had audited the books of a company it had a profitable consulting business with, PeopleSoft Inc., and barred the accounting firm from taking on new corporate clients for six months. New York-based Ernst & Young was ordered to pay $1.7 million in restitution plus interest in that case -- which also marked the first time the SEC had sought the suspension of a major accounting firm since 1975.
The issue of auditor independence was at the heart of the Enron scandal. Investigators raised questions about close ties between Arthur Andersen LLP, which did both auditing and consulting work for the Texas energy trading company.
Andersen was convicted in June 2002 of obstruction of justice for destroying Enron audit documents. The conviction was overturned by the Supreme Court in 2005 because of flawed jury instructions, but the once-venerable Andersen already had already dissolved.
In the PNC case, the SEC said that in 2001 Ernst & Young helped develop and market an accounting product for insurance giant American International Group Inc., and advised PNC on how to record the accounting for that product, which PNC had purchased.
The Ernst & Young auditors failed to make an independent review of PNC's accounting separate from the accounting firm's advice to AIG when it was helping develop the product, the SEC alleged.
As a result of PNC's faulty accounting for the transactions, it was forced to restate nearly $155 million in earnings, the SEC said.
Federal authorities previously alleged that PNC tried to conceal $762 million in sour corporate loans and investments in 2001 by selling them to three partnerships it created expressly for that purpose with AIG. For a fee, AIG offered to establish special-purpose entities to which PNC could transfer the troubled assets, but there was no actual transfer of risk from the bank to the insurer, according to the SEC.
In a July 2002 settlement, PNC was not fined but agreed to give the SEC and the Federal Reserve Bank of Cleveland greater access to company records. PNC also agreed to pay $90 million in restitution and $25 million in penalties to settle criminal charges of securities-law violations, in deferred prosecution deal with the Justice Department in June 2003.
New York-based AIG signed agreements with the SEC and the Justice Department in late 2004 in which it agreed to pay $126 million to settle allegations of aiding the flawed accounting by PNC and another firm.