PeopleSoft caught in SEC crossfire with Ernst & Young

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PeopleSoft is caught up in a regulatory row in which the Securities and Exchange Commission (SEC) has accused Ernst & Young of violating rules designed to keep accountants independent from the companies they audit.

In an administrative proceeding, the SEC alleges that Ernst & Young was auditing PeopleSoft’s books while simultaneously developing and marketing a software product with the company.

The SEC claims that the product, named EY/GEMS incorporated some components of PeopleSoft's proprietary source code into software previously developed and marketed by Ernst & Young's tax department. It further alleges that Ernst & Young tried to gain a competitive advantage by putting the source code into its product and agreed to pay PeopleSoft royalties of 15 per cent to 30 per cent from each sale of the product.

Ernst & Young says it is "surprised and disappointed" by the allegations. "Our conduct was entirely appropriate and permissible under the profession's rules," the company said in a statement. It insists its marketing deal with PeopleSoft didn't affect the software company or its shareholders. It adds that it carefully considered its consultants' actions before they were taken, concluding that such arrangements were common and permitted under accounting rules.

A hearing will be held on the case before an administrative law judge within 60 days to determine whether sanctions should be imposed on Ernst & Young.

This is the second time the SEC has brought an auditor independence action against Ernst & Young. In 1995, it settled out of court. Earlier this year the SEC censured KPMG, for allegedly violating the independence rules by investing $25 million in a mutual fund at the same time it was auditing the fund's books. KPMG was not fined, but agreed to the SEC's censure without admitting to or denying the allegations

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