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From Securities Regulation Daily, July 14, 2014

Ernst & Young’s lobbying services violated auditor independence rules

By Jacquelyn Lumb

Ernst & Young LLP today agreed to pay more than $4 million to settle SEC charges that it violated the auditor independence rules by participating in lobbying activities on behalf of two audit clients. The proceedings were brought against E&Y for certain legislative advisory services provided by Washington Council EY (WCEY), formerly known as Washington Counsel, P.C., which merged with E&Y in 2000. In a news release, Scott Friestad, an associate director in the SEC’s Division of Enforcement, noted that when an auditor acts as an advocate for its audit client, its independence is compromised. Auditor independence is critical to the integrity of the financial reporting process, he advised. E&Y settled the proceedings without admitting or denying the SEC’s findings (In Re Ernst & Young LLP, July 14, 2014)..

Lobbying services. The SEC’s order stated that WCEY sent letters signed by a senior executive of an E&Y audit client to congressional staff urging the passage of certain legislation and asked the staff to insert language into a bill that was favorable to the audit client. WCEY also met with congressional staff in an effort to defeat legislation that was detrimental to the audit client. WCEY asked third parties to approach a U.S. senator to seek support for a legislative amendment on behalf of its audit client and marked up a draft bill that inserted the audit client’s language for presentation to congressional staff.

Written policy. The SEC found that E&Y had a written independence policy for guidance with respect to providing legislative services to audit clients, but WCEY had no formal or in-person training that was tailored to the policy.

Violations. The SEC noted that, despite providing the legislative services to two of its clients, E&Y repeatedly represented that it was independent in both clients’ audit reports which were included in or incorporated by reference in public filings with the SEC. As a result, E&Y violated Rule 2-02(b)(1) of Regulation S-X and caused both clients to violate Exchange Act Section 13(a) and rule 13a-1. The firm’s conduct also constituted improper professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(3)(1)(ii) of the SEC’s Rules of Practice.

Cooperation noted. In addition to the $4.07 million in monetary sanctions, the SEC censured E&Y and ordered the firm to cease and desist from violating the auditor independence rules and from causing violations of the corporate periodic reporting provisions of the federal securities laws. The SEC took into consideration the firm’s cooperation with its staff during the investigation and noted that the firm voluntarily issued new guidance in June 2012 to restrict legislative advisory services, with final guidance issued in May 2013.

The Release is No. 34-72602.

Companies: Ernst & Young LLP

MainStory: TopStory AccountingAuditing Enforcement

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