SEC Censures Dutch Ernst & Young Firm and Orders It to Pay $400,000 Civil Penalty

FOR IMMEDIATE RELEASE
2002-95

Washington, D.C., June 27, 2002 - In the first-ever auditor independence case against a foreign audit firm, the Securities and Exchange Commission today brought a settled enforcement action against Moret Ernst & Young Accountants ("Moret"), a Dutch accounting firm now known as Ernst & Young Accountants. The case arises from Moret's joint business relationships with an audit client. In today's order, the SEC censured Moret for engaging in "improper professional conduct" within the meaning of Rule 102(e) of the SEC's Rules of Practice, and ordered Moret to comply with certain remedial undertakings, including the payment of a $400,000 civil penalty. This is the first time that the SEC has ordered any audit firm to pay a civil penalty for an auditor independence violation. Moret consented to the order without admitting or denying the SEC's findings.

"An auditor's independence must be beyond reproach," said Stephen M. Cutler, Director of the SEC's Division of Enforcement. "The financial reporting process and the law demand no less. When an auditor enters into a joint business relationship with an audit client to generate revenue, its independence is fundamentally impaired."

"Auditor independence has no geographic limitations," said Paul R. Berger, an Associate Director of Enforcement. "Regardless of location, auditors have a fundamental obligation to ensure their independence. Investors have a right to expect that any audit firm, foreign or domestic, has no improper business ties to its audit client."

As described in the SEC's order, Moret audited the 1995, 1996, and 1997 financial statements of Baan Company, N.V., a business software company headquartered in the Netherlands whose stock at the time was quoted on the Nasdaq National Market. During this period, according to the SEC, consultants affiliated with Moret had joint business relationships with Baan that impaired Moret's independence as auditor. Most of these joint business relationships were established to allow Moret consultants to assist Baan in implementing its software products for third parties. The joint business relationships included a Dutch government-subsidized project for Moret and Baan to jointly develop faster software implementation tools; an agreement to coordinate global efforts in implementing Baan software products for third parties; joint marketing activities emphasizing the "partnership" and overall coordination between Baan and Moret in the implementation of Baan software products; and Baan's use of Moret consultants as subcontractors and temporary employees in servicing Baan's clients. Altogether, the SEC found that Moret consultants billed Baan approximately $1.9 million from these improper joint business relationships during the years in question. According to the SEC's order, Baan disputed, and ultimately did not pay, approximately $328,000 of these billings, which further impaired Moret's independence as auditor.

The SEC also found that, when Moret audited Baan's 1997 fiscal year financial statements, Moret improperly used and relied on audit work performed by its affiliated firm in the United States, Ernst & Young LLP. At the time, according to the SEC, Ernst & Young also lacked independence from Baan due to joint business relationships it had with Baan. As described in the SEC's order, the work performed by Ernst & Young was purported to be "internal audit" work relating to Baan's U.S. subsidiary, but in fact resulted in Ernst & Young's significant participation in the year-end external audit being conducted by Moret. For example, the SEC found that Ernst & Young performed extensive procedures in the areas of revenue recognition and accounts receivable, which were used and relied upon by Moret in conducting its external audit of Baan. The SEC further found that Moret cited Ernst & Young's work repeatedly in its audit working papers, and used that work to confirm the accuracy and appropriate scope of similar work being contemporaneously performed by a small accounting firm in California that had been engaged as the external auditor for Baan's U.S. subsidiary. Finally, the SEC found that because Ernst & Young lacked independence from Baan, Moret's independence was impaired when its used and relied upon Ernst & Young's audit procedures in connection with the audit of Baan's 1997 fiscal year financial statements.

Based on these findings, the SEC concluded that Moret's conduct constituted an extreme departure from the standards of ordinary care that resulted in violations of the auditor independence requirements imposed by the SEC's rules and by generally accepted auditing standards. In addition to censuring Moret, the SEC ordered Moret to comply with a number of remedial undertakings, including the payment of a $400,000 civil penalty.

Contacts:
Stephen M. Cutler, Director, Division of Enforcement, (202) 942-4500
Paul R. Berger, Associate Director, Division of Enforcement, (202) 942-4560