SEC Sues Ernst & Young in Republic Case

WASHINGTON - The Securities and Exchange Commission has filed a lawsuit charging that the accounting firm of Ernst & Young engaged in improprieties when it served as auditor of the defunct Republic National Bank of Texas.

The SEC said that because the auditors had financial relationships with the bank, they lacked independence. The lack caused the bank's annual reports from 1983 to through 1986 to be "materially false and misleading," the agency said.

Real Estate Partnerships

More than 50 partners of Arthur Young & Co., which merged with Ernst & Whinney in 1989 to form Ernst & Young, participated in real estate partnerships that received nearly $16 million in loans from the bank, according to charges the SEC filed in federal court in Washington.

At least 10 of the Arthur Young partners also received more than $5 million in personal loans from Republic Bank, the SEC said. The agency said its investigation of the relationships is continuing.

Republic Bank was one of the institutions that merged in 1987 to form First Republic Bank Corp. Subsidiary banks were seized about 14 months later. The estimated costs of the closings, at $2.9 billion, were the highest in Federal Deposit Insurance Corp.'s history.

The SEC also charged that Arthur Young maintained no-interest accounts at Republic with an average daily balance of at least $400,000, in part as "consideration" for the audit relationship.

The SEC asked the federal court for a permanent injunction against Ernst & Young for securities law violations stemming from its lack of independence. The matter was referred to the commission by the FDIC.

Rash of Investigations

Ernst & Young is the latest firm to be caught in federal regulators' expanding investigations of audit practices and alleged conflicts of interest related to bank and thrift problems.

The Office of Thrift Supervision last month subpoenaed all of KMPG Peat Marwick's thrift audit records for 1989 and 1990. The investigation grew out of a dispute over the Big Six firm's audit of San Francisco Federal Savings and Loan and alleged conflicts of interest with individual auditors.

The Oklahoma State Board of Public Accountancy on May 17 concluded a two-year investigation and hearing into KPMG Peat Marwick's role as auditor of Penn Square Bank, whose 1982 collapse sent shock waves through the banking industry. The board is expected to hand down a ruling later this year. The state charges, among other things, that the auditors had $3 million in questionable loans from the bank.

In December, Coopers & Lybrand consented to an OTS cease-and-desist order stemming from the firm's 1986 audit of the defunct Silverado Banking, Savings and Loan Association, the Denver thrift on whose board Neil Bush, the President's son, sat.

To curb potential conflicts of interest, the professional ethics committee of the American Institute of Certified Public Accountants this week proposed to ban accountants from borrowing from banks and thrifts that their firms audit.

Debra Cope in Washington contributed to this story.

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