Ernst & Young LLP

Division of Enforcement and Office of Chief Accountant
Charge Firm With Violations Stemming From
Joint Business Relationships With Audit Client

On November 13, 2002, the Commission instituted public administrative proceedings against Ernst & Young LLP ("E&Y") in an auditor independence case arising from E&Y's joint business relationships with one of its audit clients. The proceedings are substantially similar to proceedings the Commission instituted against E&Y on May 20, 2002 (see Rel. No. 34-45964) but dismissed without prejudice on October 23, 2002 (see Rel. No. 34-46710).

As reflected in today's order instituting the proceedings, the Commission's Division of Enforcement (the "Division") and Office of Chief Accountant ("OCA") allege that E&Y violated the auditor independence requirements imposed by the Commission's rules and by generally accepted auditing standards in connection with E&Y's audits of the financial statements of PeopleSoft Inc. from 1994 through 2000, which occurred during the same period as the joint business relationships. According to the allegations made by the Division and OCA, E&Y violated Rule 2-02(b) of Commission Regulation S-X and caused PeopleSoft to file reports and other documents with the Commission throughout the relevant period that failed to include independently audited financial statements as required. The Division and OCA are seeking an order, pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 (the "Exchange Act"), that would require E&Y to cease and desist from committing or causing such violations and any future violations and to disgorge the audit-related fees it was paid for the audits in question. The Division and OCA are also seeking an order sanctioning E&Y for engaging in "improper professional conduct" within the meaning of Commission Rule 102(e) and newly-enacted Exchange Act Section 4C, which was added by Section 602 of the Sarbanes-Oxley Act of 2002.

Among other things, the Division and OCA allege that, while E&Y was serving as PeopleSoft's auditor, E&Y and PeopleSoft jointly developed and marketed a software product called "EY/GEMS for PeopleSoft," which incorporated certain components of PeopleSoft's proprietary source code into software previously developed and marketed by E&Y's tax department. According to the allegations, E&Y sought to gain a competitive advantage by incorporating PeopleSoft's source code into its product, and agreed to pay PeopleSoft royalties ranging from 15% to 30% from each sale of the resulting product, with a guaranteed minimum royalty of $300,000. In addition, the Division and OCA allege that, throughout the relevant period, E&Y earned hundreds of millions of dollars in consulting revenues from implementing PeopleSoft software for third parties pursuant to an "Implementation Partners Agreement" it had with PeopleSoft. In doing so, the Division and OCA allege, E&Y closely coordinated and jointly marketed its implementation services with PeopleSoft, including reciprocal endorsements of each other, links to each other's websites, holding themselves out as "business partners" of one another, and sharing customer information, customer leads, and "target accounts." As noted in today's order, this is the second auditor independence case the Commission has commenced against E&Y. In 1991, the Commission filed a complaint in federal court charging that E&Y, by failing to maintain its independence, caused and aided and abetted violations by two other audit clients of their Exchange Act filing obligations. That case was settled in 1995 with E&Y consenting to a Final Order directing E&Y to comply with an undertaking to comply with applicable auditor independence standards and guidelines. See Litigation Release Nos. 12885 (June 13, 1991) and 14442 (March 15, 1995).

A hearing in the present case will be scheduled before an administrative law judge to determine whether the allegations contained in the order are true, to afford E&Y an opportunity to establish any defenses, and to determine what remedial actions or sanctions, if any, should be imposed against E&Y.