Ernst & Young May Escape Major Damage

The move by California officials to seek a revocation of the accounting license of Ernst & Young may further tarnish the firm’s reputation but is unlikely to result in major damage to the firm’s operations in the long run, industry officials said Wednesday.

The staff of the state Board of Accountancy has recommended that the board revoke or suspend Ernst & Young’s license to do business in California because of “gross negligence” in audits of Irvine-based Lincoln Savings & Loan and its parent firm, American Continental Corp. of Phoenix.

But the state agency, which regulates the accounting industry, has never taken such strong action against a major firm.

“Historically, that sort of Draconian penalty has not been imposed, and I would be very surprised for it to be imposed in this situation,” said John C. Burton, an accounting professor at Columbia University’s Graduate School of Business.

Karen J. Scott, the interim managing officer for the state board, filed the administrative action against Ernst & Young on Nov. 16. The accusations, which Ernst & Young denies, set into motion a hearing procedure before an administrative law judge.

While the staff recommends the revocation or suspension of Ernst & Young’s license, the hearing could also result in a reprimand, probation or no action at all.

Officials charge in the administrative action that Ernst & Young was “grossly negligent” by failing to follow proper accounting procedures in audits of the 1987 financial statements of Lincoln and its parent firm, American Continental Corp. in Phoenix.

“The firm stands behind its work,” said Mort Meyerson, a spokesman for Ernst & Young. “All standards were followed.”