It must not be a whole lot of fun over at Ernst & Young these days.

First, there was that rather nasty controversy over the tax shelters it sold to executives at Sprint Corp.

Not too long thereafter, as part of an ongoing investigation into auditor independence violations, the Securities and Exchange Commission deemed E&Y’s internal controls inadequate and moved to have the firm banned from accepting any new publicly traded clients for a period of six months.

In a 120-page brief (and when government is involved, 120 pages may be akin to a newsletter) the regulator blasted the firm's internal checks as well, inadequate, stating that the “independence control system is unworthy to be so called."

Whoa!

If I were a partner at E&Y, that series of events alone would encourage me to seek out an empty stool at one of the Big Apple’s 2,000 or so watering holes and perfect my dart game by aiming at likenesses of Ken Lay, Bernie Ebbers, several unpopular SEC commissioners and probably some legislators as well.

And just last week, five consumer-protection groups —

Consumer Federation of America, U.S. Public Interest Research Group, Consumers Union, Consumer Action and Common Cause —

drafted a letter to Securities and Exchange Commission Chairman William Donaldson charging that an E&Y memorandum advising audit clients on how to implement the non-audit services requirement in Sarbanes-Oxley "makes a mockery of Congress' intent that this process serve to ensure the independence of the audit. The letter went on to say that the document provided a fundamentally misleading view of audit committees' responsibilities."

The memo apparently encourages client audit committees to adopt a pre-approval process for broad categories of non-audit services, as opposed to examining specific services and determining whether they butt heads with the auditor independence requirements of Sarbanes-Oxley. Or, in other words, any services that are not prohibited under the reform act are deemed good to go.

E&Y denied the charges leveled by the advocacy groups and, to be fair, a firm that size with a shaky track record over the past several years, fashions itself as an easy target. And last week’s revelations about its $2.6 million janitorial inspections or “pristine audits” of troubled former client HealthSouth certainly didn’t help to get its head under the audit-independence radar. But that’s fodder for another column.

The more pressing question raised by the consumer groups is how widespread are similar practices regarding advising clients on non-audit services by rival Big Four concerns?

The advocacy quintet also submitted several bullet points they believe would help rectify any problem or nebulous language in Sarbanes-Oxley with regard to auditor independence.

To my knowledge Ernst does not have the franchise on intellectual capital among the profession. If such a thing were implemented there, can anyone who follows the profession naively believe that other firms haven’t deployed similar strategies?

It’s inevitable that when stringent new laws are passed there are always going to be small holes in the fence so to speak.

It’s just a matter for the powers that be to ensure they don’t get large enough so that say, auditing firms looking for shortcuts, are able to walk through them.

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