It is beginning in earnest. As predicted by many, regulators and in particular the SEC, seem to be setting their sights on the Big Four. (Notice that I no longer include Andersen.) And unlike with the criminal proceedings against Andersen, it is not for shredding documents. It involves a claim directly involving the auditor relationship.

On May 20 of this year, the SEC instituted public administrative proceedings against Ernst & Young in an auditor independence case arising from its dealings from 1994 through 2000 with PeopleSoft, one of its audit clients. It is alleged that E&Y and PeopleSoft jointly developed and marketed EY/GEMS for PeopleSoft, which incorporated components of PeopleSoft's proprietary source code into software developed by E&Y.

The SEC claims that E&Y agreed to pay PeopleSoft royalties ranging from 15 percent to 30 percent from each sale of the resulting product, with guaranteed minimum payments of $300,000. In addition, during the same period, E&Y supposedly earned hundreds of millions of dollars in consulting revenues from implementing PeopleSoft software for third parties under an "Implementation Partners Agreement" that it had with PeopleSoft. The joint marketing included, according to the SEC, reciprocal endorsements, links to each other's Web sites, holding themselves out as "business partners" of one another, and sharing customer information, customer leads, and "target accounts."

Of course, the above are only allegations, but the controversy goes to the very essence of what constitutes independence in the auditing relationship. The shredding by Andersen may be an interesting sideshow, but the action against E&Y indicates that the regulators' future efforts might open up some rather fascinating cans of worms and deal with the substantive issues raised by former SEC Chairman Levitt's failed initiative to really toughen the independence rules.

You may remember that Levitt pulled back, in part because of a strong lobbying effort--the same type of lobbying effort that is now being brought to bear as Congress considers accounting reform. Proceedings like this against E&Y really help focus on exactly what is being argued about in Washington and which ultimately may have more of an influence and impact on the future of auditing for CPA firms than even the Enron/Andersen experience.

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