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EY lobbying violated auditor independence rules, SEC says

Photo by Julie DiMauroAccounting giant Ernst & Young will pay $4 million to settle civil charges that it violated auditor independence rules after one of its units lobbied congressional staffers on behalf of audit clients, the Securities and Exchange Commission said Monday.

The SEC said  the firm was settling the case without admitting or denying the charges.

The SEC’s order said an Ernst & Young subsidiary lobbied congressional staff on behalf of two audit clients. The lobbying activities were impermissible under the SEC’s auditor independence rules because they put the firm in the position of being an advocate for those clients. 

While it was providing the legislative advisory services on behalf of clients, EY repeatedly represented that it was “independent” in audit reports issued on the clients’ financial statements.

“Auditor independence is critical to the integrity of the financial reporting process. When an auditor acts as an advocate for its audit client, that independence is compromised,” said Scott W. Friestad, associate director in the SEC’s Division of Enforcement. 

The SEC’s order said Ernst & Young’s subsidiary, Washington Council EY (WCEY), impaired the firm’s independence by sending letters signed by a senior executive of an Ernst & Young audit client to congressional staff, urging passage of certain legislation. It also met with congressional staff to try to defeat legislation detrimental to the business interests of an Ernst & Young audit client.

The SEC’s order requires Ernst & Young to pay $4.07 million in sanctions, including disgorgement of $1.24 million, prejudgment interest of $351,925.98, and a penalty of $2.48 million. 

In January, the SEC charged accounting firm KPMG with violating auditor independence rules. An investigation found that the firm provided non-audit assistance such as bookkeeping and corporate finance services to the affiliates of companies it was auditing.


Julie DiMauro is the executive editor of FCPA Blog and can be reached here.

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