Ernst & Young in SEC Probe of PNC’s Books

The Securities and Exchange Commission is investigating accounting firm Ernst & Young for its role in designing and then auditing a financial product that PNC Financial Services Group Inc. allegedly used to inflate profit, an Ernst & Young spokesman said Tuesday.

“We are cooperating fully with the SEC in its review,” spokesman Charles Perkins said.

American International Group Inc., the world’s biggest insurer, had hired Ernst & Young to help develop and market a financing arrangement that PNC used to improperly move $762 million in bad loans and investments off its books in 2001, according to the SEC. Ernst & Young, the second-biggest U.S. accounting firm, also was the auditor that year for PNC, a Pittsburgh-based bank.

“There is a conflict of interest there,” said Don Moore, a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh. “Did it bias the individual auditors in this particular case? It’s like asking whether 40 years of smoking led to someone’s lung cancer.”

SEC spokesman John Heine declined to comment.