January 7, 2013 / 10:40 PM / 8 years ago

Exclusive: SEC probes Ernst & Young over audit client lobbying

WASHINGTON/NEW YORK (Reuters) - The Securities and Exchange Commission is investigating whether auditing company Ernst & Young violated auditor rules by letting its lobbying unit perform work for several major audit clients, people familiar with the matter told Reuters.

The entrances to the offices of Ernst & Young is seen in New York April 28, 2009. REUTERS/Shannon Stapleton

The SEC inquiry began shortly after Reuters reported in March 2012 that Washington Council Ernst & Young, the E&Y unit, was registered as a lobbyist for several corporate audit clients including Amgen Inc, CVS Caremark Corp and Verizon Communications Inc [ID:nL2E8DL649], according to one of the sources.

The SEC’s enforcement division and its Office of the Chief Accountant are looking in to the issue, according to the two sources, who spoke in recent days and who could not be named because the investigation is not public.

It is unclear how far along the probe is, or whether it could result in the SEC filing civil charges against Ernst & Young, one of the world’s largest audit and accounting firms.

An SEC spokesman declined to comment.

Ernst & Young spokeswoman Amy Call Well declined to comment on whether the company was being investigated. “All of our services for audit clients undergo considerable scrutiny to confirm they are consistent with applicable rules,” she said.

U.S. independence rules bar auditors from serving in an “advocacy role” for audit clients. The goal is to allow auditors to maintain some degree of objectivity regarding the companies they audit, based on the idea that auditors are watchdogs for investors and should not be promoting management’s interests.

The SEC’s rule does not definitively say whether lobbying could compromise an auditor’s independence. It is more focused on barring legal advocacy, such as expert witness testimony.

In interviews last year, former SEC Chief Accountant Jim Kroeker told Reuters that certain lobbying activities could potentially be covered under the general prohibition on advocacy. Kroeker is now an executive at Deloitte, a rival of Ernst & Young.


Harvard Business School Professor Max Bazerman said on Monday that it was “abundantly clear” that a firm that is lobbying for a company is no longer capable of independently auditing that company.

Ernst & Young has previously said it complied with independence rules. It also said that it did not act in an advocacy role and that the work performed by its lobbying unit was limited to tax issues.

Tax consulting is a permissible activity under auditor independence rules if it does not involve public advocacy.

About two months after publication of the Reuters story, federal records showed Washington Council Ernst & Young was no longer registered as a lobbyist for Amgen, CVS Caremark or Verizon Communications.

A spokesman for Amgen did not immediately respond to calls seeking comment. Verizon and CVS spokesmen declined to comment.

Ernst & Young also terminated a lobbying relationship with a fourth company, Nomura Holdings Inc, which also used an E&Y affiliate for auditing services.

Obtaining an independent view on the books is the main reason companies are required to hire outside auditors, said Richard Kaplan, law professor at the University of Illinois.

Ernst & Young was suspended in 2004 from accepting new public company audit clients for six months because of alleged violations of independence rules. The suspension stemmed from a joint venture that Ernst had in the 1990s with business software provider PeopleSoft, now part of Oracle Corp, when Ernst was also auditing PeopleSoft’s books.

An SEC administrative law judge ordered Ernst & Young to give back $1.7 million in audit fees and issued a cease-and- desist order against future independence violations.

Editing by Matthew Lewis

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