The New Mexico Public Accountancy Board has joined the Securities and Exchange Commission and the California Board of Accountancy in disciplining Ernst & Young over the firm's audits of former client PeopleSoft.
The New Mexico board said that it voted unanimously to authorize the issuance of two Notices of Contemplated Action against Ernst & Young, following the SEC's action against the Big Four firm.
"The arrogance shown by Ernst's management is appalling and will not be tolerated by this board," said board chairman Bruce Malott.
While Ernst & Young operates no offices in New Mexico, it has two firm permits to practice for its offices in Arizona and Colorado to do business in the state, and it does work for several notable New Mexico clients.
The firm, which has the right to request a hearing, faces the possibility of a fine and/or the suspension or revocation of its firm permits to conduct business in New Mexico. The board said that the notices will be communicated to the firm by the New Mexico State Attorney General's Office.
In April, the SEC ruled that E&Y wasn't independent in its audits of PeopleSoft's financial statements for fiscal years 1994 through 1999. SEC Chief Administrative Law Judge Brenda P. Murray barred Ernst from accepting new SEC-registered auditing clients for six months, ordered the firm to give up $1.7 million in audit fees and prejudgement interest, and required it to hire an independent consultant to review the firm's independence policies and procedures.
The SEC said that E&Y was auditing PeopleSoft's books at the same time that its international tax group had business relationships with PeopleSoft, including a partnership through which E&Y entered a licensing and distribution agreement with the company, and that Ernst was auditing PeopleSoft's books at the same time that its consulting group had an implementation partnership with PeopleSoft.
"The New Mexico Public Accountancy Board realizes that it is just symbolically 'slapping Ernst's wrists,' but it is doing so after reflecting locally and globally on this issue," said Malott. "Thousands of individual New Mexicans invest in the stock market. Thousands more trust their retirement security to the Educational Retirement Board and Public Employees' Retirement Association. I don't think these folks can feel very comfortable when they learn of the duplicity of Ernst & Young as it 'crawls from one client's financial bed into another.'"
Last week, the California Board of Accountancy sanctioned Ernst over the PeopleSoft audits. The CBA slapped E&Y with a 30-day stayed suspension, placed the firm's license on probation for three years, and required it to hire a third-party reviewer to examine its California audits.
In a letter to the California board, E&Y said, "We wish to emphasize that no one, at the SEC or elsewhere, has ever challenged Ernst & Young's audit work for PeopleSoft or contended that any of the PeopleSoft financial statements upon which Ernst & Young reported were materially misstated." The letter also noted that the firm sold its consulting practice to Capgemini in 2000, which "serves to eliminate concern over any repetition of the PeopleSoft situation," and noted that, since 2000, it has instituted "substantive and significant" improvements and changes to its independence standards and system of controls.
