July 4, 2002

According to the July 3rd issue of the Washington Post, administrative law judge Brenda P. Murray found that the SEC improperly initiated the SEC’s enforcement action against Ernst & Young regarding alleged violations of auditor independence (see our June ezine for details of the allegations). E&Y challenged the SEC’s action because it proceeded on the vote of only one commissioner, Commissioner Hunt after the other two commissioners recused themselves. Past ties to Ernst & Young prevented Chairman Pitt and Commissioner Glassman from voting.

According to the Post, in papers filed in the case, the SEC staff said that E&Y was a repeat offender and “remains both positioned and likely to commit future violations of the auditor independence rules” and argued that Commissioner Hunt voted to initiate the case under authority delegated to him as the commission’s duty officer to handle urgent matters. The judge found the SEC failed to prove the matter was urgent. The judge’s order, which does not prohibit the SEC from filing the case again in the future, can be appealed to a federal appellate court. But securities lawyers said the judge’s order means that, unless the agency can prove the case is urgent, at least two commissioners must be able to participate in the vote.

Under the ethics rules, Pitt’s one-year recusal expires on August 3, and after that he will decide whether to participate in matters on a case-by-case basis, SEC spokeswoman Christi Harlan said.