By Sarah N. Lynch and Dena Aubin
WASHINGTON/NEW YORK, Jan 7 (Reuters) - The U.S. Securities
and Exchange Commission is investigating whether auditing
company Ernst & Young violated auditor rules by letting its
lobbying unit perform work for several major audit clients,
people familiar with the matter told Reuters.
The SEC inquiry began shortly after Reuters reported in
March 2012 that Washington Council Ernst & Young, the E&Y unit,
was registered as a lobbyist for several corporate audit clients
including Amgen Inc, CVS Caremark Corp and
Verizon Communications Inc, according to one of the sources.
The SEC's enforcement division and its Office of the Chief
Accountant are looking in to the issue, according to the two
sources, who spoke in recent days and who could not be named
because the investigation is not public.
It is unclear how far along the probe is, or whether it
could result in the SEC filing civil charges against Ernst &
Young, one of the world's largest audit and accounting firms.
An SEC spokesman declined to comment.
Ernst & Young spokeswoman Amy Call Well declined to comment
on whether the company was being investigated. "All of our
services for audit clients undergo considerable scrutiny to
confirm they are consistent with applicable rules," she said.
U.S. independence rules bar auditors from serving in an
"advocacy role" for audit clients. The goal is to allow
auditors to maintain some degree of objectivity regarding the
companies they audit, based on the idea that auditors are
watchdogs for investors and should not be promoting management's
interests.
The SEC's rule does not definitively say whether lobbying
could compromise an auditor's independence. It is more focused
on barring legal advocacy, such as expert witness testimony.
In interviews last year, former SEC Chief Accountant Jim
Kroeker told Reuters that certain lobbying activities could
potentially be covered under the general prohibition on
advocacy. Kroeker is now an executive at Deloitte, a rival of
Ernst & Young.
'ABUNDANTLY CLEAR' LINE
Harvard Business School Professor Max Bazerman said on
Monday that it was "abundantly clear" that a firm that is
lobbying for a company is no longer capable of independently
auditing that company.
Ernst & Young has previously said it complied with
independence rules. It also said that it did not act in an
advocacy role and that the work performed by its lobbying unit
was limited to tax issues.
Tax consulting is a permissible activity under auditor
independence rules if it does not involve public advocacy.
About two months after publication of the Reuters story,
federal records showed Washington Council Ernst & Young was no
longer registered as a lobbyist for Amgen, CVS Caremark or
Verizon Communications.
A spokesman for Amgen did not immediately respond to calls
seeking comment. Verizon and CVS spokesmen declined to comment.
Ernst & Young also terminated a lobbying relationship with a
fourth company, Nomura Holdings Inc, which also used an
E&Y affiliate for auditing services.
Obtaining an independent view on the books is the main
reason companies are required to hire outside auditors, said
Richard Kaplan, law professor at the University of Illinois.
Ernst & Young was suspended in 2004 from accepting new
public company audit clients for six months because of alleged
violations of independence rules. The suspension stemmed from a
joint venture that Ernst had in the 1990s with business software
provider PeopleSoft, now part of Oracle Corp, when
Ernst was also auditing PeopleSoft's books.
An SEC administrative law judge ordered Ernst & Young to
give back $1.7 million in audit fees and issued a cease-and-
desist order against future independence violations.
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