Page 17 - DCOM204_AUDITING_THEORY

Unit 1: Introduction to Auditing

13. ........................... audit is performed to know the corporate social responsibility. Notes
14. ........................... is an audit to ensure you’re in compliance with relevant specifications,
contract, or regulation.

Case Study Cap Gemini and Ernst & Young, Potential

Self-Dealing

uditors have their own codes of ethics. Where there is no code of ethics, or where
the code of ethics permits a degree of conflict of interest, the auditors tread at
Atheir own risk. The following case study underscores the traditional common
law obligations of auditors as fiduciaries, even before the adoption of the Sarbanes-
Oxley Act of 2002. This section covers some basic issues in auditing standards.
Responding to SEC criticism of ostensible conflicts of interest, some major accounting
firms, such as KPMG and Arthur Andersen, have spun off their consulting arms as
independently owned and managed entities. Ernst & Young LLP chose another route.
The story of E&Y and its alliance with Cap Gemini leads from a regulatory no-action
letter to a court case alleging breach of the accountant’s fiduciary duty. The tale leads
to lessons learned.
Independence of Auditors

SEC No-Action Letter to Ernst & Young LLP on Alliance with Cap Gemini Ernst & Young
LLC. By no-action letter dated May 25, 2000, the SEC’s Chief Accountant advised Ernst &
Young LLP that it would consider E&Y to maintain its independence even though Cap
Gemini Ernst & Young were to provide IT services to E&Y audit clients. The no-action
letter imposed a number of conditions that (1) limit at the outset and within five years end
E&Y’s equity interest in Cap Gemini; (2) impose limitations on Cap Gemini’s use of the
E&Y name; (3) require a strict separation of E&Y and Cap Gemini’s corporate governance;
(4) forbid any revenue sharing between E&Y and Cap Gemini; (5) forbid any joint marketing
agreements between E&Y and Cap Gemini; and (6) restrict any shared services between
E&Y and Cap Gemini. Letter of Lynn E. Turner, Chief Accountant of SEC, to Kathryn A.
Oberly, Esq., Ernst & Young, May 25, 2000. Litigation Alleging Breach of Accountant’s
Fiduciary Duty; Liability for Systems Integrator’s Nonperformance. Unfortunately, an
SEC no-action letter is not a vaccine against client lawsuits. Accountants engaged in
management consulting should pay careful attention to a ruling against Ernst & Young,
LLP (“E&Y”) and its successor in interest (by sale of consulting business), Cap Gemini
Ernst & Young, U.S. LLC (“CGEY”). This case is instructive to anyone in a licensed
professional capacity engaged in ancilli-ry or multidisciplinary consulting practice.
Pre-trial Ruling
In a pre-trial ruling in early January 2002 on a motion to dismiss, without deciding the
final outcome, the court found that E&Y was potentially legally subject to claims of breach
of fiduciary duty and punitive damages arising out of a failed software implementation
by CGEY, a company in which apparently E&Y is a substantial owner. (The was no allegation
or showing of a failure to exercise the skill and care of a reasonably diligent accountant, so
the court noted that there were no claims of professional malpractice (whether relating to
accounting or computer consulting).
Contd...

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