Auditor independence is critical. The opinion issued by the audit firm regarding the financial statements of an audit client represents in part that the firm is independent. That judgment is based on an assessment of all the facts and circumstances of the relationship involving the audit firm and the issuer under SEC precedent. Thus, for example, the Commission has stated that if the relationship places the accountant in a position of being an advocate for an audit client, the firm is not independent.
Yet this precisely what EY did with regard to two audit clients – act as an advocate. In the Matter of Ernst & Young, Adm. Proc. File No. 3-15970 (July 14, 2014). In 2000 EY acquired Washington Counsel, P.C., a legislative advisory services provider. In 2009 EY, through Washington Counsel, provided legislative advisor services for Firm A and Firm B. For example, for Firm A Washington Counsel urged the passage of legislation to congressional staff on behalf of the client on two different occasions.
Washington Counsel also provided legislative advisory services for Firm B. For example, on one occasion the advisory firm attempted to persuade congressional offices to withdraw support for a proposal that would have been detrimental to the client.
In both instances Washington Counsel acted as an advocate for the Firm A and Firm B. Both firms were audit clients of E&Y. At the time EY had issued audit opinions for each firm represented that it was independent despite the fact that is was not since the firm was acting as an advocate for each client.
At the time of the violations “EY issued a written independence policy intended to provide guidance on the provision of legislative advisory services to audit clients,” according to the Order. The Order states that EY did not provide formal, in-person training “specifically tailored to the policy.” It does not specify that the policy was violated by the conduct involved here.
The Order alleges violations of the independence rules. Specifically, it alleges violations of Rule 2-02(b)(1) of Regulation S-X. It also alleges that the audit firm caused violations of Exchange Act Section 13(a) and Rule 13a-1 by the two audit clients.
In resolving the proceeding the Commission took into account the cooperation of EY and its remedial acts which included the issuance of “new guidance restricting such legislative advisory services.”
To resolve the proceeding EY consented to the entry of a cease and desist order based on the provisions cited in the Order and to a censure. The firm also agreed to pay disgorgement of $1,240,000, prejudgment interest and a civil penalty of $2,480,000.