SEC Starts Informal Inquiry into E&Y Consultant Pay

The Securities and Exchange Commission is looking into whether Ernst & Young LLP’s independence was impaired when it paid $377,500 to a consultant that served on the boards of three companies it audited.

The companies are executive-search firm Korn/Ferry International, retailer Best Buy Co. and TeleTech Holdings Inc., which runs telephone call centers, the Wall Street Journal reported. Mark C. Thompson, who calls himself a "leadership development" consultant, sat on the boards of the three companies while working for Ernst & Young. He has since resigned from all three boards.

The SEC bars auditors from entering into business relationships with audit clients. The only exception would be if the firm made the payments "as a consumer in the ordinary course of business." The firm paid Thompson from December 2002 through April 2004. The payments ended at about the time the SEC gave Ernst & Young a six-month suspension from taking new audit clients following an auditor-independence inquiry involving PeopleSoft.

"We are cooperating fully with the SEC's inquiry into this matter," Ernst & Young spokesman Charles Perkins said. "We revised our procurement policies in March and conducted an extensive review of all procurement relationships. As a result of that review, we notified the companies in question of the work that Mr. Thompson's company had done for us."

Thompson’s work for Ernst & Young involved interviewing top corporate executives, industry experts and Ernst and Young’s own leaders for the firm’s marketing materials. Korn/Ferry and Best Buy contend that they do not believe the firm’s independence was impaired.

The SEC also requires all members of a NYSE-listed company's nominating and governance committee to be independent. An "independent" director can't be employed at the company or have worked there within a three-year period. The NYSE also bars an independent director from receiving more than $100,000 a year from a company other than payment for board service.

TeleTech would not comment on the SEC’s informal inquiry. All three companies said Thompson resigned from their boards for reasons other than a conflict with Ernst & Young.