WASHINGTON, (Reuters) - A judge suspended Big Four accounting firm Ernst & Young LLP on Friday from accepting new, SEC-registered audit clients for six months in a case involving software group PeopleSoft Inc.
Securities and Exchange Commission Chief Admini-strative Law Judge Brenda Murray also ordered Ernst & Young (E&Y) to pay $1.7 million in disgorgement, to refrain from future violations and to hire an outside consultant to review its policies.
The $1.7 million that E&Y will have to pay roughly equals the amount of audit fees it charged PeopleSoft for fiscal years 1994 through 1999, Murray said.
The SEC in mid-2002 accused E&Y - the No 3 US accounting firm - of violating auditor independence rules by working too closely with PeopleSoft, an audit client, on a software project.
The judge ruled ``that E&Y engaged in improper professional conduct because it violated applicable professional standards for auditors by conduct that was both reckless and negligent.''
Murray also found that a licensing agreement between E&Y and PeopleSoft related to the project ``created a direct business relationship,'' and that it was reasonable to argue that E&Y ``would not be objective in its audit of PeopleSoft.''
``E&Y's misconduct was blatant... There is nothing in this record that shows that E&Y is willing to accept the auditor independence rules applicable to business relationships with audit clients,'' she said.
Decisions by SEC administrative law judges may be appealed to the full five-member commission and then to the courts. A spokesman for the commissioners declined to comment.
``We're very gratified by the ALJ's decision,'' said Paul Berger, an associate director of the SEC's enforcement division that brought the case.
In a statement, E&Y said it is ``fully committed to working closely with an outside consultant.''``While the order will prevent us from accepting new public company audits for the next six months, it will not impair our ability to continue to serve our existing public company audit clients, accept new audit work from privately held companies, or to accept non-audit work from public companies we do not audit,'' the firm said.
Denny Beresford, professor of accounting at the University of Georgia, said the suspension was ``relatively mild'' because companies do not switch audit firms often.
``I doubt this is going to be any kind of serious business issue for Ernst & Young, but I'm sure it's not something they're happy about from a reputational standpoint,'' he said. Ernst & Young is one of the world's four largest accounting firms and its competitors include PricewaterhouseCoopers, KPMG and Deloitte & Touche.
All are now under the regulation of a new organization - the Public Company Accounting Oversight Board - that was created in 2002 by Congress after a rash of corporate financial scandals, including the Enron Corp. scandal that led to the implosion of former Big Five accounting firm Andersen.
``The judge's decision sends a clear message not only to E&Y, but to the other accounting firms as well, that there is a significant cost to failing to put investors' interests first,'' said Lynn Turner, former SEC chief accountant and now a professor at Colorado State University.
Introduction
The Annual Report of the New Building Society for the year ended December 31, 2003, will be presented tomorrow at the Tower. The report says that "In the interest of good governance and financial probity, the Board of Directors requested that the Finance Minister appoint the Bank of Guyana to inspect the financial records of the NBS and to undertake on site inspections. I am pleased to report that the Bank of Guyana carried out an inspection of the records of the NBS during the months of July and August in the year under review. While we are yet to receive the final report on the inspection, we have been advised that no major discrepancies were detected."
There are three attorneys- at-law on the Board of the Society which also has two ex-ternal legal advisers Cameron & Shepherd and McDoom & McDoom, the senior partner of which is also a member of the board. Can any one of these be good enough to tell us the source of the authority for the Minister to appoint the Bank of Guyana to inspect the financial records of an unlicensed financial institution? Can the Bank of Guyana tell the members of the Society and the public at large why it accepted what is clearly an unlawful instruction from the Minister of Finance? And why it has permitted NBS to flout the licensing requirement of the Financial Institutions Act?
Members' mandate
Once again despite a mandate from the members at the April 23, 2002 meeting for a thorough revision of the rules of the Society and half-hearted promises at each succeeding annual general meeting since then, all the Chairman could report is that a committee comprising the directors, senior management and some of our members has concluded its work and its recommendations "will be presented at a Special General Meeting of the members shortly." Surely an entity that boasts of its good governance practices with a lawyer-dominated board ought to treat a mandate from its members far more seriously.
And is it not inconsistent to justify the unrestrained use of proxies because of members' inability to attend meetings, while requiring members to collect the annual reports from the Society's office? The Society may wish to note that it is a principle of good corporate practice which is enshrined in the Companies Act 1991 that all relevant documents to be considered at the meeting be delivered to or sent by prepaid post to the member.
Why does the Society persist in speaking of competitors? There is no other financial institution whose income is totally tax exempt, which is unlicensed under the Financial Institutions Act, which has more than fifty (50) members but is not registered under the Securities Industry Act, which does not have to meet Central Bank Reserve requirements or which by virtue of its tax status can win a disproportionate share of Government of Guyana Treasury Bills.
Results
The Society once again had a good year although what it erroneously refers to as profits fell by 19% from $316M in 2002 to $255M in 2003. The Chairman described the reduction as intentional, although he did draw attention to the falling yield on Treasury Bills "to approximately 3.5% at the end of 2003," which he described as "an all time low." In fact, the rate on Treasury Bills (at December 31, 2003 of 3.40%) was higher than at any time during 2003.
While the average interest earned on mortgages fell by a mere three percentage points, the interest paid on depositors' balances declined by 0.36 percentage points. Unfettered by the provisioning requirements of the Financial Institutions Act, the Society has a provision against loan losses of less than half percent of its mortgage portfolio.
With total surplus for the past three years exceeding $3/4B, it means that existing stakeholders, who cannot sell their interest are forfeiting their stake of this magnitude. This policy on reserves, of which the board seems extremely proud, is conceptually wrong, excessively prudent and indefensibly unfair to existing members.
Statement of Condition
The Society's financial position remains extremely strong with total assets of $24B, fast approaching the Guyana Bank of Trade and Industry with $27.3B. The loan portfolio which makes up 46.4% of total assets saw growth declining from 18.1% in 2002 to 11.1% in 2003. Investments comprising mainly Treasury Bills make up 44.21 per cent, a growth rate of 21.98% (2002 - 9.70%).
Conclusion
Despite the decline in surplus, the Society's position is sound. The effective subsidy it receives as a tax-exempt organisation allows it to play the lead role in the country's housing drive with 4,984 accounts at December 31, 2003, up from 4,506 in 2002.
This column believes that good governance is almost everything, and requires more than lip service. While the Society is in much better shape than the country, it needs to recognise that success can be easily reversed by poor governance practices. The Society must now deliver on its obligation to move into the 21st century.