SEC again checks for Ernst & Young conflict

Accounting firm aided in design of PNC product used to transfer bad loans

December 08, 2004|By BLOOMBERG NEWS

WASHINGTON - The Securities and Exchange Commission is investigating Ernst & Young LLP for its role in designing and then auditing a financial product that PNC Financial Services Group Inc. is suspected of using to inflate profit, according to an Ernst & Young spokesman.

"We are cooperating fully with the SEC in its review," Charles Perkins, a spokesman at the New York-based firm, said yesterday.

American International Group Inc., the world's biggest insurer, 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 No. 2 U.S. accounting firm, also was the auditor that year for PNC, a Pittsburgh-based bank.

SEC spokesman John Heine declined to comment.

The investigation marks at least the third time this year that the SEC has scrutinized potential conflicts at Ernst & Young. In April, after finding that the firm had violated conflict rules while auditing PeopleSoft Inc., the agency banned Ernst & Young from accepting new public-company audit clients for six months.

Five months later, Ernst & Young told regulators that it might also have broken rules while performing tax work in China for about 100 U.S. audit clients, including Sun Microsystems Inc.

American International agreed Nov. 30 to pay $126 million in settlements with the SEC and Justice Department in the PNC case. The insurer had hired Ernst & Young to help develop a transaction called a contributed guaranteed alternative investment trust security (C-GAITS), according to the SEC's complaint against American International.

American International marketed C-GAITS to at least six companies in 2001 as a tool to shift poorly performing assets, such as loans and investments, off balance sheets, the SEC said. American International offered, for a fee, to set up a "special purpose entity" to hold the assets, the agency said. American International neither admitted nor denied wrongdoing in its settlement.

American International obtained formal opinion letters from Ernst & Young in 2001 indicating that U.S. accounting rules would permit a company in a C-GAITS transaction to remove assets from its financial statements, the SEC said. American International used the letters when marketing C-GAITS to "potential counter-parties," according to the agency's complaint.

PNC completed three such transactions with American International in 2001, transferring $762 million in loans and venture capital investments into off-balance-sheet American International entities. As a result, the SEC said, PNC overstated its 2001 earnings per share by 52 percent.

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