As the Teachers Insurance and Annuity Association of America and the College Retirement Equities Fund deals with the backlash over the conflict of interest that led to the resignation of two of its trustees, the controversy could cost Big Four firm Ernst & Young its gig as TIAA-CREF's auditor.

The fallout stems from a conflict revealed last week that led to the resignations of Professor Stephen A. Ross, a trustee of the College Retirement Equities Fund, and William H. Waltrip, a trustee of the Teachers Insurance and Annuity Association of America. In announcing the resignations, TIAA-CREF said that it would "immediately begin to develop a request for proposals from accounting firms that have the requisite capacity and expertise to perform audit services of TIAA-CREF for their respective 2005 audits," and that it has also taken steps to ensure that their respective trustees will identify promptly any business relationships that may bring the independence of the outside auditors into question.

A report this week by The Wall Street Journal cited people close to TIAA-CREF as saying that Securities and Exchange Commission chief accountant Donald Nicolaisen told TIAA-CREF last week that Ernst could complete its 2004 audit, but that he would be very upset if it rehires Ernst for its 2005 audit.

The controversy erupted last week, when TIAA-CREF announced the resignations, which were triggered by a conflict created by a deal made in August 2003 between E&Y's valuation practice and a company owned by the two trustees, of which a majority was owned by Professor Ross.

The relationship, which was created to develop intellectual property and related services to value corporate stock options, was terminated in August of this year, weeks after E&Y informed TIAA-CREF that the business relationship between the companies violated the SEC's auditor independence standards. Both Ross and Waltrip said that neither was aware that this business relationship raised an issue under the SEC's auditor independence standards.

In disclosing the resignations, TIAA-CREF said that the audit committees of TIAA-CREF and E&Y determined that the trustees' business relationship with E&Y didn't compromise E&Y's independence from TIAA-CREF or the integrity or objectivity of the respective audits for 2003 and 2004.

According to the Journal, Ernst said in a statement that, at the time the contract was signed, the firm's "independence procedures were not comprehensive enough to catch the fact" that Ross and Waltrip were TIAA-CREF trustees, but that it has "aggressively re-examined" its policies and procedures, made improvements, and is "confident that such a mistake would not occur today." The Journal report cited people familiar with the matter as saying that the SEC's enforcement division has opened an inquiry into the events surrounding the violation.

TIAA-CREF chairman and chief executive Herbert M. Allison Jr. has come under increased fire because he knew about the independence violation back in August, but, until late last week, had informed only one of his six fellow members on TIAA-CREF 's board of overseers about the matter, according to reports.

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