SEC Fines EY, More Auditor Independence Cases to Come

The U.S. Securities and Exchange Commission (SEC) fined an overseas office of Ernst & Young (EY) $400,000 for lack of independence in the audits of Baan Company, N.V., a business software company headquartered in the Netherlands. An SEC official indicated that other auditor independence cases might soon follow.

The SEC charges that joint business relationships between Baan and EY's overseas office resulted in an impairment of auditor independence. The relationships were established to help EY consultants implement Baan's software products for third parties. They included a project subsidized by the Dutch government for the joint development of faster software implementation tools, as well as joint marketing activities emphasizing the "partnership" between Baan and EY, and Baan's use of EY consultants as subcontractors and temporary employees in servicing Baan's clients.

In some ways, the Baan case is similar to the independence violations alleged in the PeopleSoft case, which EY is contesting. Examples:

  • Both cases reach back a number of years. The Baan case involves audits of 1995, 1996, and 1997 financial statements. Since then, EY resigned as Baan's auditor in 1998, Baan was acquired by Invensys Plc in 2000, and EY's U.K. affiliate is now Invensys's auditor.

  • Commissioner Isaac Hunt was the only SEC commissioner to vote on both matters. Chairman Harvey Pitt and Commissioner Cynthia Glassman both recused themselves because they have past ties to Ernst & Young.

SEC Associate Enforcement Director Paul R. Berger told Bloomberg, "There may well be audit-independence cases coming down soon, including some involving the Big Four accounting firms." The Commission has already filed auditor independence charges against KPMG and PricewaterhouseCoopers. But neither of these firms was fined. The EY case is the first time an accounting firm was fined for an independence violation.

-Rosemary Schlank


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