agreed to pay almost $3 million to settle Securities and Exchange
Commission (SEC) proceedings over an independence issue. Two of the
Big Four firm’s partners were also censured by the
The settlement relates to what the SEC described as an
independence-impairing relationship between E&Y and Mark
Thompson. While Thompson served as a member of the board of
directors of three of the Big Four firm’s audit clients, E&Y
simultaneously collaborated with him in creating a series of audio
CDs called The Ernst & Young Thought Leaders
During the course of the relationship, E&Y paid Thompson
compensation totalling $377,500. This sum, allegedly unknown to
E&Y, comprised about half of Thompson’s net income at the
Despite the business relationship with Thompson, E&Y claimed
to be independent in its audit reports for the three companies.
The two E&Y partners censured by the SEC were John Ferraro
and Michael Lutze.
According to the SEC, Ferraro, the firm’s vice-chair for markets
at the time, signed the agreement with Thompson to collaborate on
the CDs despite knowing Thompson was a director in two companies
that were E&Y audit clients.
“Notwithstanding this knowledge, Ferraro failed to seek, or
perform, or otherwise obtain any auditor-independence assessment
prior to executing the contract,” the SEC claimed.
Lutze was the co-ordinating partner for the audit engagement at
one of the companies where Thompson served on the board. According
to the SEC, Lutze discovered Thompson was serving on the board but
took no follow-up action.
The SEC noted the remedial steps taken by E&Y since
discovering the independence breach. “Since the conduct discussed
in this order, E&Y has significantly improved its independence
policies and procedures. E&Y has, among other things,
established a new business-relationship evaluation process for
review and evaluation of both existing and new business
relationships,” the commission said.
E&Y agreed to pay disgorgement of $2,382,000 and prejudgment
interest of $537,000 to the SEC.
Lutze was banned from appearing or practicing before the SEC as
an accountant. He can apply for restatement after one year. Ferraro
was ordered to cease and desist from causing any violations and any
future violations of the Securities Exchange Act.
Commenting on the ruling, E&Y said: “We have revised our
independence policies and procedures since this issue arose, which
the SEC noted in its order. This settlement puts this matter behind
us and we remain committed to taking every possible step to
maintain our independence, which is the foundation of our audit
work and our obligation to investors.”