Last week, the California Board of Accountancy sanctioned Ernst & Young over questions about the firm's independence in its dealings with former client PeopleSoft.

According to the California board settlement (see box at right), E&Y will pay $100,000 and face three years of probation. Also, the firm will be required to hire an independent consultant to check a sampling of its California audits, and an independent auditor to ensure its compliance with SEC rules.

The action comes just as Ernst & Young heads into the last month of a half-year ban on accepting new audit clients. The ban was imposed in April by an administrative law judge at the SEC. During the years 1995 to 1999, Ernst & Young’s tax division worked with PeopleSoft to develop and market a software program to help companies manage payroll and tax-withholding issues. During the same period, E&Y audited Peoplesoft’s financial statements, and the SEC charged the firm with failing to maintain independence.

But the California Board of Accountancy isn't the only regional board considering action against the firm. Also last week, the New Mexico Accountancy Board voted 4-0 to issue notice that it is contemplating action against E&Y for the same matter.

Malott

Board Chairman Bruce Malott told the Associated Press that New Mexico’s board simply wanted to make sure the firm isn’t still engaged in similar practices. Malott said board members want to know "what processes and procedures have been put into place to ensure that this kind of behavior or similar behavior doesn't happen again."

Ernst & Young said in a statement last week that it was working with the independent consultant as required, and that is was currently reviewing related procedures.

Interestingly, Ernst & Young also recently confirmed it would return to mainstream management consulting after its five-year non-competition agreement with Capgemini ends next year. Most large audit firms have sold their consulting practices to avoid independence issues.

Complete details, including downloadable versions of the California board's actions and E&Y's response, are available from the box above, right.

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