Ernst & Young has agreed to pay $4 million to settle charges brought by the Securities and Exchange Commission accusing the firm of violating auditor independence rules by lobbying congressional staff on behalf of two auditing clients.

The SEC said that such lobbying activities are impermissible under the SEC’s auditor independence rules because they put the firm in the position of being an advocate for those audit clients.  Despite providing the prohibited legislative advisory services on behalf of the clients, Ernst & Young repeatedly represented that it was “independent” in audit reports issued on the clients’ financial statements, according to the SEC.

“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 SEC’s Division of Enforcement associate director Scott W. Friestad in a statement. “Ernst & Young engaged in lobbying activities that constituted improper advocacy and clearly violated the rules.”

The charges involved Ernst & Young’s subsidiary Washington Council EY. According to the SEC, the subsidiary impaired the firm’s independence in several lobbying actions. For example, WCEY sent letters signed by a senior executive of an Ernst & Young audit client to congressional staff, urging passage of certain legislation. WCEY also asked congressional staff to insert language into a bill that was favorable to the business interests of an Ernst & Young audit client. In addition, WCEY met with congressional staff in order to defeat legislation detrimental to the business interests of an Ernst & Young audit client.

WCEY also asked third parties to approach a U.S. senator to seek support for a legislative amendment sought by an Ernst & Young audit client. In addition, WCEY marked up a draft of a bill by inserting an Ernst & Young audit client’s language and sending it to congressional staff.

The SEC did not identify the clients, but according to Reuters, the firm lobbied for several auditing clients, including Amgen, CVS Caremark and Verizon Communications, before severing the businss relationships in 2012.

The firm said it regretted the actions, but added that they took place years ago. “Auditor independence is of paramount importance to EY,” the firm said in a statement forwarded by spokesman John La Place.  “EY takes great care to ensure our services for audit clients conform to all applicable SEC and PCAOB rules. We regret these instances that arose many years ago and are pleased to put this matter behind us.  In 2012, EY voluntarily decided to cease performing lobbying work for SEC registrant audit clients.”

According to the SEC’s order, Ernst & Young had issued a written independence policy intended to provide guidance on the provision of legislative advisory services to audit clients. However, Ernst & Young did not provide WCEY with formal, in-person training specifically tailored to the policy.

The SEC’s order found that Ernst & Young violated various securities laws and engaged in improper professional conduct pursuant. The SEC’s order requires Ernst & Young 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 also censured Ernst & Young and ordered payment of $4.07 million in monetary sanctions, including disgorgement of $1.24 million, prejudgment interest of $351,925.98, and a penalty of $2.48 million. 

The SEC said it took into consideration the remedial acts undertaken by Ernst & Young and its cooperation with SEC staff during the investigation. For example, Ernst & Young voluntarily issued new guidance in June 2012 restricting such legislative advisory services. The firm issued similar final guidance in May 2013.

Last week, EY also admitted to running afoul of auditor independence restrictions after one of its former partners was found to have had an "inappropriate personal relationship" with a client's former controller and chief accounting officer (see Ventas Dismisses Ernst & Young Due to Inappropriate Personal Relationship).

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