SEC Seeking Ban on E&Y New Client Additions

If the Securities and Exchange Commission gets its way, Big Four accounting firm Ernst & Young will be banned from bringing on any new publicly traded companies for six months.

The proposed sanction, filed late last week by the SEC with an administrative law judge, is a response to the ongoing investigation of alleged independence issues between E&Y and its client PeopleSoft, Inc. At issue is the four year relationship between Ernst & Young and the software maker, during which E&Y not only audited the company's financial records, but also generated significant revenues - over $450 million according to E&Y - in helping other businesses adopt and implement PeopleSoft products.

The proposed sanction would bar E&Y from bringing on any new public company audit clients for six months, and would require the firm to forfeit the audit fees it received from PeopleSoft during the 1995-1999 period in question.

A judge will now rule on the propriety of the sanctions, and both the SEC and Ernst will have a right to appeal the decision. "Our position will be (a) there's no violation and (b) there is no basis for the imposition of any sort of sanction," said Stephen M. Sacks, an attorney for Ernst.

The SEC is trying to monitor and correct the behavior of the major accounting firms, while at the same time recognizing the delicate balance of a marketplace that has very limited choices of auditing firms to turn to if they are looking to switch auditors.

"You don't want to force all those clients to scurry out and find somebody new for something the clients are innocent of," an SEC official was quoted in the Washington Post. "You don't want to do anything that cuts down too much" on the options for companies that need auditors, the official said.

However, the action should be strong enough to "wake the people up at Ernst & Young that they've got a serious problem that they have to deal with," the official added.

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