Judge Hobbles Ernst & Young for 45 Days
An administrative law judge has barred Ernst & Young, the nation’s largest accounting firm, from accepting most new business in the New York region for 45 days, ruling that the firm’s predecessor improperly overstated a company’s income.
In a decision released Thursday, Jerome Soffer also censured managing partner Michael Ferrante for unprofessional conduct over questionable 1980 and 1981 audits of U.S. Surgical Corp.
Sanctions have been imposed on only a handful of large accounting firms in the past 15 years, said the Securities and Exchange Commission, which brought the case.
An administrative law judge works for a government agency. The decision can be appealed by either side for 30 days, but Ernst & Young spokesman Mort Myerson indicated that the firm would not appeal.
“This is a very old matter in which the civil litigation was concluded many years ago without any payment by the firm,” Myerson said. “After almost 10 years, we believe it is time to put the entire matter behind us.”
In the decision, Soffer found that Ernst & Whinney--which merged in July, 1989, with Arthur Young & Co.--was negligent in failing to detect changes in U.S. Surgical’s accounting procedures.
These changes caused the Norwalk, Conn.-based maker of surgical staples and other medical supplies to overstate its income by about 18% in 1980 and 67.8% in 1981, the SEC charged.
The accounting firm, however, gave the company a clean bill of health when it audited the financial statements, which are filed with the SEC and issued to shareholders.
In making his ruling, Soffer rejected an SEC staff request for a stiff 180-day bar on the accounting firm accepting any new work that requires agency filings. Soffer said that deception by U.S. Surgical was partly to blame for the overstatement of income.
The temporary ban affects only new work on accounts in the New York metropolitan area that require SEC filings.
In the early 1980s, U.S. Surgical’s dominance of the medical staples business was threatened, and its patents were about to expire.
In an effort to boost revenue, it escalated new products introduced from one or two annually to 10 in 1980 and 14 in 1981, according to the SEC. The company also paid $5 million in legal fees in an effort to stop its former Australian dealer, Alan Blackman, from marketing competitive products.
Despite these changes, Ernst & Whinney failed to conduct an audit suited to an aggressive company undergoing transition, the SEC contended. U.S. Surgical, which previously settled SEC charges, had no comment on the latest ruling.
Soffer declined to ban Ferrante permanently from appearing before the SEC because he worked as part of an Ernst & Whinney team and lacked ultimate responsibility for the audit.
Ferrante continues to work as managing partner of the accounting firm’s White Plains, N.Y., office.
John Burton, a professor of accounting and finance at the graduate school of business at Columbia University, said the decision announced Thursday was one of the first such cases made public under new SEC rules. Formerly such disciplinary actions were generally kept private, he said.
