SECURITIES EXCHANGE ACT OF 1934
Release No. 46130 / June 27, 2002
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1584 / June 27, 2002
ADMINISTRATIVE PROCEEDING
File No. 3-10815
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In the Matter of MORET ERNST & YOUNG Respondent. |
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ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS AND ORDER PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE |
I.
The Commission deems it appropriate to institute public administrative proceedings against Moret Ernst & Young Accountants, located in the Netherlands and now known as Ernst & Young Accountants (hereinafter "Moret"), pursuant to Rule 102(e) of the Commission's Rules of Practice.1
II.
In anticipation of the institution of these proceedings, Moret has submitted an Offer of Settlement, which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the facts, findings, or conclusions herein, except that Moret admits the Commission's jurisdiction over it in these proceedings and over the subject matter of these proceedings, Moret consents to the entry of this Order Instituting Public Administrative Proceedings and Order Pursuant to Rule 102(e) of the Commission's Rules of Practice ("Order").
III.
The Commission finds that:
A. Summary
Respondent Moret, an accounting firm based in the Netherlands, audited the 1995, 1996, and 1997 financial statements of a major client at a time when consultants affiliated with Moret had joint business relationships with the same client that impaired Moret's independence as auditor. During the last of those audits, moreover, Moret used and relied on audit work performed by an affiliated accounting firm in the United States, which firm also lacked independence from the same client due to joint business relationships. Throughout the relevant period, the Moret audit client had securities that were registered with the Commission and were publicly traded in the United States, and Moret's audit reports were included in the audit client's public filings with the Commission. As discussed below, Moret violated the auditor independence requirements imposed by the Commission's rules and regulations and by generally accepted auditing standards ("GAAS"), and thereby engaged in improper professional conduct within the meaning of Rule 102(e) of the Commission's Rules of Practice.
B. Respondent
Moret is a professional services firm headquartered in the Netherlands that provides, among other things, accounting and auditing services. During the relevant period, Moret operated under the name Moret Ernst & Young Accountants, and was one of several affiliated partnerships known collectively as Moret Ernst & Young.2 Moret was and still is a member firm of Ernst & Young International.
C. Other Relevant Entities
Baan Company N.V. ("Baan") is a business software company headquartered in the Netherlands.3 During the relevant period, Baan's common stock was registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act") and was quoted on the Nasdaq National Market. As a foreign private issuer, Baan filed annual reports with the Commission on Form 20-F, each of which included a Moret audit report on Baan's financial statements for the relevant periods. In August 2000, Baan was acquired by another company, and as a result of that acquisition is no longer a U.S. registrant.
Ernst & Young LLP ("E&Y") is a limited liability partnership headquartered in New York, New York. At all relevant times, E&Y has been a member firm of Ernst & Young International, and has been engaged in the business of providing, among other things, accounting and auditing services.
D. Facts
1. Joint Business Relationships with Baan
Baan was an audit client of Moret even before Baan's May 1995 initial public offering ("IPO") of common stock in the United States. In early 1995-when Baan was preparing for its IPO-the Moret partner and senior manager then responsible for the Baan audit familiarized themselves with the Commission's auditor independence requirements. In particular, they reviewed a summary of applicable independence rules that had been prepared for them by a partner at E&Y, an affiliated firm in the United States. From that summary, the Moret audit partner and senior manager created their own summary of applicable auditor independence requirements, along with a list of criteria for acceptable engagements. They then used this summary to educate Moret consultants on business-relationship restrictions. They also used this summary to evaluate whether contemplated relationships between Moret and Baan would violate applicable independence rules. Moret consultants nonetheless entered into certain joint business relationships with Baan, each of which impaired Moret's independence as Baan's auditor for one or more of Baan's 1995, 1996, and 1997 fiscal years. These joint business relationships are described below.
a. The Dutch Subsidy Project
Well before Baan's May 1995 IPO, one of the services performed by Moret consultants was the implementation of software purchased by customers of Baan (and customers of other business software companies as well), reflecting a common form of symbiotic relationship between software implementers and software sellers. In 1994, Moret and Baan deepened this software implementation relationship by jointly applying to the Dutch government for a subsidy to research and develop faster software implementation tools. Under the subsidy plan, Moret and Baan would split the subsidy awarded based on their respective hours billed and costs incurred for the project.
Prior to the Baan IPO in May 1995, the Dutch government granted the subsidy application, and Moret and Baan started work on the project. The work on the project continued until approximately September 1995. Moret and Baan coordinated their efforts on the subsidized project. In early 1996, Moret submitted an accounting of Moret's and Baan's project expenses to the Dutch government, the accuracy of which was certified by the Moret audit partner then responsible for the Baan audit. Subsequently, the Dutch government paid the subsidy of approximately $100,000 to Moret, which in turn provided an accounting to Baan. The final accounting reflected a 51% / 49% split of the subsidy between the two parties, with Baan receiving the larger share, based on its larger proportional share of the project's total overhead costs.
b. The Triton Partner Agreement
In January 1995, Moret and a Baan affiliate entered into an agreement referred to as the "Triton Partner Agreement," which remained in effect until at least January 1997.4 After stating that its primary purposes included enabling both Moret and Baan to benefit from their respective implementation expertise, the agreement made Moret a member of Baan's software implementation "Partner Program" whereby Moret consultants would implement Baan's software for third parties. The agreement also addressed the type of coordination of efforts by Baan and Moret to develop the software implementation tools for which the Dutch government had approved the subsidy described above. It also authorized Moret to use Baan's trademarks and required Moret to establish a "Baan Center of Excellence," to be staffed by at least three dedicated Moret consultants. Finally, the agreement established guidelines for coordination of the global alliance, a joint structure for managing Baan's and Moret's activities, mutual indemnification between the parties, and prohibitions against the disclosure of confidential information.
c. Joint Marketing Activities
In late 1995, Baan and Moret began jointly marketing their services to potential customers. While engaging in this activity, Moret consultants made plain that the parties viewed each other as business partners working together to obtain customers. For example, in December 1995, Baan and Moret formed a coordinated account team to target one potential client. A Moret consulting partner wrote at the time:
This team should create win/win/win situations; for [our potential client] to have an optimal product and services package for their business issues; for Baan to generate more sales within [the potential client;] and for [Moret] to generate more services at [the potential client].
In a similar vein, in a proposal to another potential customer, a Moret consultant stated:
Baan and [Moret] have a world-wide partnership. In this partnership both parties have made concrete arrangements of working together for clients. In practice this means that Baan and [Moret] operate as one party towards the client. Our activities are fully integrated with and steered by the Baan project management.
(Emphasis added.) In addition, Moret consultants and Baan engaged in discussions concerning joint marketing opportunities.
d. Moret Consultants Acting as Baan Subcontractors or Baan Employees
During the period in which Moret was Baan's external auditor, Baan occasionally lacked sufficient staff to meet its contractual obligations to third-party clients of Baan. On at least three such occasions, Baan requested Moret to provide it with specialized professional staff to assist it in completing a project for its client. In each case, Moret complied with the request and provided its own personnel to work on the Baan project, and in each case Moret: (i) billed Baan directly for the services of the Moret personnel; (ii) agreed to have its personnel report directly to Baan (and not to Baan's client); (iii) had no contract with Baan's client for the work its personnel performed; and (iv) provided-under Baan's direct supervision-services to Baan's clients that Baan was contractually obligated to provide. Also on each of these engagements, the Moret personnel functioned in a capacity identical to that of Baan's own employees.
For example, in October 1996, Moret and Baan agreed that Moret would take over Baan's implementation responsibilities under its contract with a Turkish company. Moret consultants then worked on the Turkish project from October 1996 until July 1997, and Moret billed Baan approximately $327,923 in fees for that work. Baan also gave Moret consultants the authority to act on its behalf to complete this implementation project. Accordingly, Moret consultants signed documents and made presentations on Baan's behalf, and Moret consultants were listed in project documents as being members of the Baan implementation team. This project also resulted in a billing dispute between Moret and Baan, which further impaired Moret's independence as auditor. Moret's invoices for this project remained in dispute during Moret's audit of Baan's fiscal year 1996 financial statements, and ultimately did not get paid.
In another instance in early 1997, Baan lacked sufficient skilled staff to complete a software implementation project for a Finnish company that was then Baan's third largest customer. To solve its problem, Baan temporarily hired employees with the requisite expertise from several of its consulting partners, including Moret. Thus, in February 1997, at Baan's request, Moret provided Baan with a Senior Finance Consultant to work on the Finnish project under Baan's direct supervision. Subsequently, as the project grew, Moret provided three other experienced consultants to work on the project, also at Baan's request. Each of these Moret consultants-who, just like Baan's own employees, reported directly to Baan's Finnish project director-was responsible for completing key aspects of the implementation, including development of training materials, software testing, and customization of the software. These Moret consultants were identified in project documents as being Baan employees. Although Moret consultants were given discrete responsibilities, Baan was ultimately responsible to the Finnish company for the success of the implementation. Moret consultants worked on the Finnish project through Moret's May 1998 resignation as Baan's auditor, and beyond. During the period that Moret was serving as Baan's auditor, Moret consultants billed and collected from Baan a total of $960,000 for work on the Finnish project.
Moreover, at least one Moret consultant had managerial responsibilities for the Finnish implementation. In particular, this Moret consultant was designated as second-in-command on the project, and was given responsibility for acting as project director when the director-a Baan employee-was unavailable. Baan agreed to pay a premium to Moret for this consultant's services. In addition, Moret consultants on the Finnish project-just like Baan's own employees-were required to submit weekly time cards to Baan for approval by Baan and the Finnish company. Moret then billed Baan for the work, and Baan in turn paid Moret, but only after first collecting payment from the Finnish company. When Baan billed the Finnish company for the work performed by Moret consultants, Baan generally included a 25% mark-up over the hourly rate that Moret was charging Baan. Thus, in addition to directly helping Baan complete an implementation for an important customer, Moret's furnishing of consultants also contributed to Baan's profits.
Finally, Moret professional staff also acted as Baan employees or subcontractors in a facility called the "Baan Support Center." As its name implies, the purpose of the Baan Support Center was to provide technical support for Baan's software customers. By late 1996, the Baan Support Center had a huge backlog of customer support requests, and needed temporary employees who had experience with Baan's software. Unable to find a sufficient number of employees with the requisite experience, however, Baan asked Moret to furnish the Baan Support Center with Moret employees having at least two years' experience with Baan's financial software package. Moret agreed to do so, and Moret personnel worked in the Baan Support Center from October 1996 through Moret's May 1998 resignation as Baan's auditor, and beyond. In the Baan Support Center, Baan personnel directly supervised the Moret employees, who had identical responsibilities to those of the Center's full-time Baan employees. For example, the Moret employees often had to contact Baan's customers-both for the purpose of identifying problems and of providing solutions-and even to access the Baan customers' computer systems to help diagnose their problems. When contacting customers (either orally or in writing), all Baan temporary employees-including those supplied by Moret-were required to identify themselves as Baan employees. In all, during the period that it was serving as Baan's auditor, Moret billed and collected from Baan approximately $600,000 for work its employees performed in the Baan Support Center.
2. Reliance on the Work of a Non-Independent Auditor
a. Background
For Baan's 1995 fiscal year-the year in which Baan became a public company-E&Y audited the financial statements of Baan USA, which was Baan's U.S. subsidiary. In early 1996, however, E&Y resigned as external auditor for Baan USA so that it could, without violating the auditor independence rules, pursue joint business relationships with Baan, including subcontracting on software implementations and submitting joint proposals with Baan for software sales and implementation business.5
In early 1996, shortly following E&Y's resignation, Baan engaged a small accounting firm, headquartered near Baan USA's California offices (the "California Firm"), to audit Baan USA's financial statements for its 1996 fiscal year and to perform quarterly reviews. Prior to this engagement, the California Firm had limited experience auditing public companies or their subsidiaries, and did not issue audit reports for public companies because it was not insured to do so. However, the California Firm did not consider the Baan USA engagement to be a public company audit for three reasons: (i) the registrant was Baan, not Baan USA; (ii) Moret, not the California Firm, was the firm signing the Baan audit report; and (iii) as a condition of the engagement, Moret, while it made use of the California Firm's audit work, could not reference the California Firm's work in Moret's audit report. Under GAAS, Moret's refraining from making any reference to the California Firm's work meant that Moret assumed responsibility-and liability-for the California Firm's work on the Baan USA audit.6
By the summer of 1997, Moret faced a dilemma, which the Moret audit partner then responsible for the Baan audit engagement discussed with partners in E&Y's National Office: Moret wanted to continue to audit Baan, but no longer felt comfortable relying on-and assuming liability for-the California Firm's audit of Baan USA. This discomfort stemmed in part from the explosive growth of Baan USA, whose revenues were expected to account for as much as 40% of Baan's worldwide revenues for fiscal year 1997. To increase Moret's confidence in-and assuage its liability fears concerning-the Baan USA audit, the Moret audit partner and the E&Y National Office partners considered whether Baan could retain another "Big Six" firm to audit Baan USA. They soon discovered that, like E&Y, the other firms also lacked independence from Baan, because of consulting relationships. Subsequently, they began considering other possible solutions, including Baan's engagement of E&Y as its internal auditor for Baan USA. By September 1997, Moret was seeking input from E&Y's National Office regarding whether E&Y could, consistently with U.S. independence rules, accept this internal auditor role.
b. E&Y's National Office Cautions Moret About Possible Impairment of Independence
During E&Y's deliberations on the question of whether E&Y could serve as Baan's internal auditor, an E&Y National Office partner cautioned the Moret audit partner that internal audit work was "a grey area because it [could] directly affect the scope of external audit work and [was] hard to distinguish from external audit work in appearance." E&Y's National Office concluded that, unless such work by E&Y for Baan were carefully structured, it could give the appearance of E&Y significantly participating in Baan's external audit. Ultimately, E&Y's National Office determined that E&Y could act as internal auditors for Baan USA, but that the engagement should follow the standard U.S. rules for outsourcing the internal audit function in order to avoid the appearance of external audit services.7
After receiving guidance from E&Y's National Office regarding the internal audit solution, the Dutch Moret audit partner sent several e-mails to E&Y, in English, discussing the terms of the engagement. In these e-mails, the Moret audit partner requested "internal audit" procedures that Moret could use for its external audit of Baan. In one of them, the Moret audit partner wrote:
[E&Y's procedures must] be adequate for us to use . . . for the external audit without having to supplement a lot of work. So they should be similar to a normal external audit plan, perhaps supplemented with some real internal audit stuff to further substantiate that this clearly is an internal audit . . . .
In another e-mail, the Dutch Moret audit partner wrote: "We will have to do the year end audit [for] 1997 (using [the California Firm] as far as necessary)[; E&Y] will however also have to issue [a] report on the year end audit and then continu[e] without [the California Firm] in 1998." The Moret audit partner indicated that Moret might have to resign from the Baan audit if E&Y would not agree to perform internal audit work along the lines he wanted. In connection with this discussion, E&Y's National Office reiterated its view that any internal audit engagement should "follow the standard U.S. model to avoid the appearance of external audit services," and cautioned against the preparation of an "audit report" by E&Y. E&Y's National Office concluded that "sufficient audit coverage could be achieved within this framework to provide [Moret] with the assurance it needs to audit the consolidated accounts."
c. Moret Violates the Independence Rules by Using and Relying Upon E&Y's Work in Moret's External Audit of Baan's 1997 Fiscal Year Financial Statements
In auditing Baan's fiscal year 1997 financial statements, Moret used and relied on E&Y's purported "internal audit" work, and E&Y thereby became significantly involved in Moret's external audit. Among other things, E&Y and Baan had not signed an engagement letter;8 E&Y received its instructions as to audit scope and critical audit areas from Moret (rather than Baan); E&Y, at Moret's request, performed procedures similar to, and redundant of, those performed by the California Firm as external auditor; Baan never authorized E&Y to perform any year-end procedures for fiscal year 1997; and E&Y did not provide a report to Baan, but did provide a draft report to Moret, which was included in Moret's working papers and never subsequently revised.
In essence, E&Y's "internal audit" work took on the very role that E&Y's National Office had cautioned against: that of significant participation in Baan's year-end external audit. The California Firm conducted a full scope audit of Baan USA, and both Moret and E&Y reviewed and tested that work in connection with the audit. Moret, however, also used and relied on E&Y's work for its fiscal year 1997 audit of Baan, citing that work repeatedly in its audit working papers and using that work to confirm the accuracy and appropriate scope of the California Firm's work, thereby making E&Y an essential part of Moret's external audit team. Moreover, almost all of E&Y's fiscal year 1997 audit work was duplicative of the audit procedures that the California Firm had already conducted, or was conducting, as part of its external audit (although the California Firm's audit procedures were broader and more extensive that those E&Y performed). For example, E&Y performed extensive procedures in the areas of revenue recognition and accounts receivable, even though the California Firm had already performed the same procedures as part of its external audit.
Thus, because E&Y lacked independence from Baan, Moret's own independence was impaired when it used and relied upon E&Y's "internal audit" procedures in connection with its audit of Baan's 1997 fiscal year financial statements.
E. Legal Analysis
In Sections 12(b) and 13(a) of the Exchange Act, Congress gave the Commission the authority to require that financial statements be certified by an independent public accountant. The Commission has exercised that authority in Regulation S-X, which requires that accountants be independent when they audit SEC registrants. Rule 2-01 of Regulation S-X states that the Commission does not consider an accountant to be "independent" from its audit client if the accountant has any direct financial interest or material indirect financial interest in the client. With respect to such interests, Section 602.02.g of the Commission's Codification of Financial Reporting Policies further provides that "[d]irect . . . business relationships [with an audit client], other than as a consumer in the normal course of business . . . will adversely affect the accountant's independence with respect to that client."
Rule 2-01(b) of Regulation S-X also specifies that the SEC's independence requirements apply to: (i) all partners, shareholders, and other principals of audit firms, (ii) any professional employee involved in providing any professional service to an audit client, its parents, subsidiaries, or other affiliates, and (iii) any professional employee having managerial responsibilities and located in the engagement office or other office of an audit firm that participates in a significant portion of the audit.9 Similarly, AICPA rules prohibit an auditor from being connected with the audit client as an employee or "in any capacity equivalent to that of a member of management." AICPA Professional Standards, Vol. 2, ET § 101-1(B)1 (Interpretation of Rule 101). The AICPA rules also specifically prohibit an auditor from using non-independent professionals as part of the external audit engagement team. See ET §§ 191.142 - 191.143 ("Use of Nonindependent CPA Firm on an Engagement").10 Finally, Rule 2-01(c) of Regulation S-X provides that, in determining whether an accountant is independent with respect to a particular client, the Commission considers all relevant circumstances, including evidence concerning all relationships between the accountant and the client or any of its affiliates.
Rule 2-02 of Regulation S-X requires the audit report to state "whether the audit was made in accordance with generally accepted auditing standards." Here, Moret's audit reports on Baan's financial statements for each of fiscal years 1995, 1996 and 1997 stated that the audits were conducted in accordance with GAAS, when in fact they were not. Consistent with the Commission's rules and pronouncements, GAAS also requires auditors to maintain strict independence from their audit clients. Codification of Statements on Auditing Standards, AU § 220.03, explains the independence requirement as follows:
It is of utmost importance to the profession that the general public maintain confidence in the independence of independent auditors. Public confidence would be impaired by evidence that independence was actually lacking, and it might also be impaired by the existence of circumstances which reasonable people might believe likely to influence independence. . . . Independent auditors should not only be independent in fact; they should avoid situations that may lead outsiders to doubt their independence.
As described above, due to its joint business relationships with Baan from 1995 through 1997, Moret lacked independence from Baan when it issued audit reports on Baan's financial statements for its 1995, 1996, and 1997 fiscal years, all of which were included in the company's public filings with the Commission. During its audit of Baan's 1997 fiscal year financial statements, moreover, Moret improperly relied on the audit work of an affiliated firm, E&Y, which also lacked independence from Baan. Moret's conduct in this regard constituted an extreme departure from the standards of ordinary care that resulted in violations of the auditor independence requirements imposed by the Commission's rules and by GAAS.
IV.
Based on the foregoing and on Moret's Offer of Settlement, the Commission finds that Moret engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice.
V.
Accordingly, the Commission hereby accepts Moret's Offer of Settlement and orders, effective immediately, that:
A. Moret is censured pursuant to Rule 102(e)(1); and
B. Moret shall comply (within 60 days of this Order unless otherwise specified below) with the following undertakings, as agreed to in its Offer of Settlement:
(1) Moret shall pay a civil penalty in the amount of $400,000. Payment shall be made within 21 days of the date of this order. Payment shall be made by postal money order, certified check, bank cashier's check or bank money order, payable to the order of the "United States Securities and Exchange Commission." The payment shall be hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6342 General Green Way, Stop 0-3, Alexandria, VA 22312, under cover of a letter identifying the name and number of this administrative proceeding and the Respondent. A copy of the cover letter and the payment shall be simultaneously transmitted to Russell G. Ryan, Assistant Director, Division of Enforcement, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, DC 20549-0806;
(2) Moret shall develop and implement Auditor Independence Policies for the firm, which policies shall fully incorporate SEC auditor independence requirements, including those prohibiting business relationships between the accounting firm and its audit clients. These Auditor Independence Policies shall specifically address the types of business relationships that have been found to impair the firm's independence in this Order. The firm shall distribute these Auditor Independence Policies to each of its partners and professional employees;
(3) Moret-for so long as it participates in or performs audits of the financial statements of companies subject to the SEC's independence rules-shall require all of its partners and managers who provide any services to such companies to undergo training regarding auditor independence, based on its Auditor Independence Policies, at least once every twelve months;
(4) Moret-in connection with any audit of the financial statements of a company subject to the SEC's independence rules-shall require its audit engagement teams to perform and document procedures designed to confirm Moret's independence from the audit client. Moret will reflect in its audit documentation any independence issues that arose and how such issues were resolved. Moret shall retain all such audit documentation for a period of at least 5 years after the date of the audit report to which such documentation relates;
(5) Moret-for so long as it participates in or performs audits of the financial statements of companies subject to the SEC's independence rules-shall establish an Approval Procedure to determine, prior to entering into any business relationship with any audit client having securities registered with the Commission, whether such contemplated relationship would impair the firm's independence as to any audit client having securities registered with the Commission. Moret shall designate a Responsible Partner to oversee the Approval Procedure. At the conclusion of each Approval Procedure, the Responsible Partner shall sign an Approval Procedure Affirmation identifying all independence issues considered and how each issue was resolved. Moret shall maintain all Approval Procedure Affirmations for a period of at least 5 years after the date of their execution;
(6) Moret-for so long as it participates in or performs audits of the financial statements of companies subject to the SEC's independence rules-shall establish an "Independence Affirmation" which each of its partners and managers must sign on an annual basis. The Independence Affirmation will attest that the affiant: (i) is familiar with the firm's Auditor Independence Policies; (ii) is independent as to all audit clients of the accounting firm that are subject to the SEC's independence rules in all circumstances in which the affiant is deemed a "covered person" under 17 C.F.R. § 210.2-01(f)(11); and (iii) is not aware of any business relationships between Moret and any company having securities registered with the Commission that would impair the accounting firm's independence. In the event the affiant cannot truthfully furnish any of the foregoing attestations, the Independence Affirmation will attest to the reasons therefore; and
(7) Moret shall distribute a copy of this Order to all of its partners and professional employees within 10 business days after entry of the Order.
By the Commission.
Jonathan G. Katz
Secretary
________________________
| 1 | Rule 102(e)(1) of the Commission's Rules of Practice, 17 C.F.R. § 201.102(e), provides in pertinent part:
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| 2 | Another of the affiliated partnerships of Moret Ernst & Young during the relevant period was Moret Ernst & Young Consultants, which shared in profits, office expenses, and management personnel with Moret Ernst & Young Accountants. Subsequent to the period relevant to this Order, Moret Ernst & Young Accountants became known as Ernst & Young Accountants, and Moret Ernst & Young Consultants became part of Cap Gemini Ernst & Young, a separate management and information technology consulting firm. For purposes of describing the relevant facts in Section III.D. of this Order, the term "Moret" refers to and includes all of the constituent parts and personnel of what were known during the relevant period as Moret Ernst & Young Accountants and Moret Ernst & Young Consultants. For all other purposes and in all other sections of this Order, the term "Moret" refers to and includes only the entity formerly known as Moret Ernst & Young Accountants and now known as Ernst & Young Accountants in the Netherlands. |
| 3 | During the period relevant to this Order, Baan had dual headquarters in the Netherlands and in the United States; the U.S. headquarters were moved from Menlo Park, California to Reston, Virginia in April 1998. |
| 4 | During this time Baan also entered into similar agreements with other "Big Six" firms who were not Baan's auditors. |
| 5 | Although E&Y performed no audit procedures during the audit of Baan's 1996 financial statmements, it continued to provide Baan and Moret with advice concerning U.S. accounting standards and to perform reviews of Baan's filings with the Commission. |
| 6 | See Codification of Statements on Auditing Standards, AU § 543. |
| 7 | These rules were set forth in AICPA Ethics Interpretation 101-13 ("Extended Audit Services"), which delineate when an external auditor can perform internal audit services for an audit client. |
| 8 | E&Y and Baan did reach an agreement in principle regarding the performance by E&Y of internal audit services beginning for the first quarter of Baan's 1998 fiscal year. In this regard, a draft engagement letter was prepared and circulated but never finalized. |
| 9 | The AICPA has provided the following guidance on whether an office participates in a significant portion of the audit:
ET § 101.11. An auditor of an SEC registrant must comply with SEC independence requirements as well as those of the AICPA, to the extent the latter are not inconsistent with SEC regulations. |
| 10 | This rule does permit non-independent persons' work to be used in a manner similar to the work of internal auditors, but only as long as all applicable Statements on Auditing Standards are met. |