On July 14, 2014 the Securities and Exchange Commission (SEC) filed a public administrative and cease-and-desist proceedings against Ernst & Young (E&Y) for E&Y’s violation of audit independence conduct regarding legislative lobbying on behalf of its audit clients.

E&Y has agreed to pay disgorgement of $1,240,000, together with prejudgment interest thereon of $351,925.98, and a civil money penalty of $2,480,000, for a total of $4,071,925.98 and it has agreed to cease & desist the activity.  See http://www.sec.gov/litigation/admin/2014/34-72602.pdf

The SEC public administrative and cease-and-desist proceedings against E&Y arose out of certain legislative advisory services provided by Washington Council EY (“WCEY”), which has been part of EY since 2000. Prior to 2009, certain conduct related to WCEY’s provision of legislative advisory services violated the independence rules with respect to two of EY’s SEC-registrant audit clients.

WCEY sent letters urging passage of bills to congressional staff on behalf of one of its clients.  These bills were important to this client’s business interests.  WCEY also asked congressional staff to insert into a bill a provision favorable to this client.

For another audit client, WCEY attempted to persuade congressional offices to withdraw their support for legislation detrimental to that client’s business interests. In addition, WCEY worked closely with congressional staff in drafting an alternative bill more favorable for the client.   WCEY also marked up a draft of the alternative bill, inserting specific language written by the client and sent the mark-up to congressional staff.

Despite providing the services described herein, E&Y repeatedly represented that it was “independent” in audit reports issued the clients’ financial statements.

By doing so, E&Y violated Rule 2-02(b)(1) of Regulation S-X and caused the clients to violate Section 13(a) of the Exchange Act and Rule 13a-1.  E&Y’s conduct also constituted improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.