In the classic film “Monty Python and the Holy Grail,” an overseer gives a pair of inept soldiers assigned to guard a prisoner a simple set of instructions: “Stay here and make sure he doesn’t leave the room.”

The ensuing — not to mention side-splitting — dialogue between the buffoonish duo and their superior manages to jumble that basic security mandate into an absurd melange of conflicting interpretations.

Interpretations may be welcomed when eliciting movie critiques but, within an accounting firm, idiosyncratic interpretations of generally accepted accounting principles or auditing standards, and exactly what constitutes auditor independence, could lead to legal decisions such as the one handed down last month by Administrative Judge Brenda Murray against Big Four firm Ernst & Young.

And trust me, the wording of her ruling was nowhere near as funny as a Monty Python vignette.

Not even close.

Her 69-page tome was bereft of any alternative interpretation but, nevertheless, upheld a six-month ban on the firm from accepting new clients, coupled with a $1.7 million fine — all stemming from independence violations with former client PeopleSoft.

Backing up a bit — to last May, to be exact — the Securities and Exchange Commission filed a brief to suspend E&Y from accepting new public audit clients for six months as punishment for entering a joint marketing agreement during the 1990s with the Pleasanton, Calif.-based software company, while serving as its outside auditor.

E&Y contended that its tax and consulting units used software from PeopleSoft, that the concerns had partnered in some joint marketing efforts and that, as such, the firm should have been viewed as a customer of PeopleSoft.

However, the magistrate declared that E&Y was not just a customer, but rather enjoyed a far cozier role as an “implementation partner,” and had earned nearly half a billion dollars from installations of its clients’ programs at other companies. Judge Murray wrote, “The persuasive evidence in this record is that EY is neither implementing, nor does it have in place, policies and procedures that can reasonably be expected to ensure compliance with independence rules in business dealings with audit clients.”

Whew! You can tell that wasn’t scripted by John Cleese or Eric Idle.

In addition to the client sabbatical and the fine, E&Y must now retain an SEC-approved independent consultant to monitor the firm.

Ernts & Young has said that it won’t appeal the ban. From both a pocketbook and a perception standpoint, that makes sense. It’s certainly easier for the firm to pay the fine, try to keep its head under the regulatory radar and wait it out.

Besides, the firm has other testy situations to sort out.

After shelling out $15 million to settle a tax shelter dispute with the Internal Revenue Service last year, there’s still the ongoing matter of an SEC probe into its travel rebate programs with several major airlines for client-related T&E.

But in the end, maybe it’s a case of reaping what you sow.

By not appealing the ban, E&Y does deserve some credit for picking itself up off the canvas after getting knocked down and at least trying to do the right thing.

Even if it has a judge telling it exactly what the right thing is.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access