But this is just not good, especially given their prior transgressions in the same area that resulted in their being barred from taking on new audit clients for six months. As I have mentioned before with regard to the rest of the Big 4 firms, in particular PwC of whom I have the most knowledge: The Independence Offices are fighting against the entrenched attitudes of the partners and the firm leadership that tell them, “Business comes first.”
They also have no idea how to create alliances and partnerships, such as the one that was the subject of this EY issue, without mucking up. The partners go off on their own and do something they think is sexy, don’t ask anyone until it’s too late, but by then it’s perceived to be too “big” for anyone to say no. With fines as paltry as $2.9 million, they have a point:
Ask for forgiveness rather than permission.
When is the SEC or someone else (??) going to let the firms know they mean business? How much more of this amateurish approach to alliances, without regard to the rules they must adhere to as an audit firm first, are the regulators willing to accept?
And Mark Thompson? Is he barred from serving on a Board, in particular on an Audit Committee, for life?
Update from a great new source, a lawyer, of course.
By April 2004, shortly before the relationship ended, E&Y’s policies required that matters potentially relating to independence be reviewed by its independence office and disclosed by the relevant coordinating audit partner to the audit client. After reviewing the relationship between Mr. Thompson and the firm, E&Y concluded that the relationship did not impair its independence because it fit within the “consumer in the ordinary course of business” exception to the independence rules general prohibitions.
The Commission rejected E&Y’s claim that its relationship came within an exception to the rule, finding that, in fact, the firm’s independence had been compromised and that Mr. Thompson was a cause. According to the Ernst & Young Order, “[b]usiness relationships with persons associated with the audit client in a decision-making capacity, such as audit client directors, officers and substantial stockholders” are prohibited by the independence rules.
This conclusion is based on Rule 2-01(c)(3) which provides that “[a]n accountant is not independent if, at any point during the audit and professional engagement period, the accounting firm … has any direct or material indirect business relationship with the audit client, or with persons associated with the audit client in a decision making capacity, such as an audit client’s officers, directors or substantial stockholders.”
Here, Mr. Thompson was a member of the boards of three E&Y audit clients and on the audit committee of one. Mr. Thompson was well aware that E&Y was the auditor of the three firms since he signed filings for each and, as a member of Company A’s audit committee, participated in the retention of the audit firm…
Ernst & Young LLP, one of the so-called Big Four accounting firms, agreed to forfeit more than US$2.9-million to settle U.S. regulatory claims it compromised its independence while auditing three companies.
The firm “engaged in improper professional conduct” after agreeing in 2002 to create an audio series of recorded interviews with industry leaders in collaboration with Mark Thompson, a board member for three of its clients, the Securities and Exchange Commission said in a statement on Wednesday. It didn’t identify the companies.
Best Buy Co., the largest U.S. electronics dealer, announced plans in 2004 to drop Ernst & Young as its auditor after learning Thompson, a member of its audit committee, had a separate relationship with the accounting firm. Thompson earned about half his income by coaching Ernst & Young partners to conduct talk show-style interviews for its “Thought Leaders Series” of compact discs, the SEC said.
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Francine McKenna (@retheauditors on Twitter) is a CPA, writer, speaker and subject matter expert with more than twenty-five years of experience in consulting and professional services including tenure at two Big 4 firms, both in the US and abroad. She is a two-time Gerald Loeb Award finalist and a frequently quoted freelance journalist. For more info, click the "About" link at the bottom of this page.