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July 15, 2014

SEC and EY settle for $4m over auditor independence breach

The Securities and Exchange Commission (SEC) has charged EY with violations of auditor independence rules, which has resulted in a settlement costing EY $4.07m.

The SEC found that EY’s subsidiary Washington Council EY (WCEY) lobbied congressional staff on behalf of two audit clients which is "impermissible" under the SEC’s auditor independence rules.

Within the scope of the settlement between both parties, EY agreed to pay $4.07m in monetary sanctions, consisting of a penalty of $2.48m, disgorgement of $1.24m and prejudgment interest of $0.35m.

The SEC said it took under consideration EY’s cooperation with the SEC staff during the investigation and remedial acts undertaken by the firm, such as the issuing of new guidance in June 2012 restricting such legislative advisory services.

Along with the fining, the SEC censured EY and ordered the firm to cease and desist from any future violations of the auditor independence rules.

"Auditor independence is critical to the integrity of the financial reporting process. When an auditor acts as an advocate for its audit client, that independence is compromised," associate director in the SEC’s division of enforcement Scott Friestad said.

According to the SEC, EY’s WCEY approached congressional staff multiple times by letter, meeting or through third parties in order to urge and support legislation according to the business interests of an audit client.

"Ernst & Young engaged in lobbying activities that constituted improper advocacy and clearly violated the rules," Friestad continued.

In response to the settlement, EY said in a statement:

"Auditor independence is of paramount importance to EY. EY takes great care to ensure our services for audit clients conform to all applicable SEC and PCAOB rules. We regret these instances that arose many years ago and are pleased to put this matter behind us. In 2012, EY voluntarily decided to cease performing lobbying work for SEC registrant audit clients."

In detail, the SEC found EY guilty of violations of Rule 2-02(b)(1) of Regulation S-X, Section 13(a) of the Securities Exchange Act and Rule 13a-1, and of improper professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.

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