The sanctions imposed on Ernst and Young in the PeopleSoft decision seems harsh to some. There is a six-month suspension of acquiring new audit clients, a $1.7 million fine, a continuing review of E&Y independence policies and procedures, and a cease-and-desist order. However, I got the distinct impression that the SEC administrative judge, although appalled by Ernst and Young's  failures and noting that hundreds of millions of dollars in revenue was earned by E&Y because of the E&Y/PeopleSoft business relationship, pulled back a bit.

This "hesitancy" was also seen elsewhere in a series of recent GAO reports that openly discussed the concern that we can't afford the demise of another national auditing firm like Andersen. Underlying all this appears to be a hope that the Public Company Accounting Oversight Board's actions will ensure independence is properly maintained at accounting firms, especially national ones that audit the overwhelming majority of public companies.

Time will tell, but I wonder if the audit-only firm is in the future. It could come as the result of legislative action, but more likely it would come about as a result of market conditions.

The marketing pitch would be that this audit-only firm, loaded with seasoned auditors, would be a no-brainer for public companies to choose. It would be argued that there could be no possibility or even the perception of a conflict of interest with this choice because no consulting services are ever performed by the auditor.

Changing third-party expectations, growing concern over impediments to auditors' independence, greater regulatory oversight, increased costs, dangers of lawsuits, and Sarbanes-Oxley are having a significant impact on the business model of the audit firm. The Big Four represents the best evidence of this as there is no resemblance to what they looked like five years ago. So maybe audit-only firms will come next.

Of course, even with such audit-only firms, there would still exist the concern about being sued by investors or financiers when a public company went south. That's why you currently see accounting firms lobbying in the United Kingdom to limit the liability of auditors. I would expect those audit-only firms would also want legislation passed to limit their liability.

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