Ernst & Young hit by ban and fine

Auditors have to keep the different parts of their business separate

Ernst & Young has been banned from taking on new clients in the US after regulators questioned its relationship with software company PeopleSoft.

Judge Brenda Murray said that E&Y should not accept new auditing work for six months from Securities and Exchange Commission-listed companies.

E&Y is not expected to appeal the ruling, which includes a $1.7m fine.

The SEC was concerned about E&Y's role as auditor of PeopleSoft because the two also had a business agreement.

Tarnished

Explaining her decision, Judge Murray said that "E&Y engaged in improper professional conduct because it violated applicable professional standards for auditors by conduct that was both reckless and negligent".

"E&Y's misconduct was blatant," she continued.

"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".

The ruling is another blow to the reputation of the accountancy firm, which is a member of the so-called Big Four that have dominated the industry in recent years.

Their working practices have been more closely scrutinised following the scandals that surrounded companies such as energy-trading giant Enron.

Close eye

To ensure that E&Y does not repeat earlier mistakes, Judge Murray also ruled that the company must hire an outside consultant to check over its policies.

E&Y said it is "fully committed to working closely with an outside consultant."

The effect on E&Y's business, however, may be limited by the fact that the decision only applies to listed, public companies and does not relate to work that has already been agreed.

In fact, E&Y explains, "it will not impair out 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".