PracticeAccounting FirmsE&Y has its cruellest month.

E&Y has its cruellest month.

Ernst & Young has got itself into a deep, deep hole. We've known for some time of the stand-off the firm has had with Equitable Life over its role as auditor to the troubled life assurer. Sympathy for E&Y's plight seems to have evaporated, with most industry watchers expecting it to settle for a significant - but not firm-busting sum - before next April's court case.

But over the last week events have take a serious turn for the worse.

On Thursday Paul Hermelin, chief executive at IT services provider Cap Gemini Ernst & Young, announced the company would in future be known only as Cap Gemini. He may not actually have laid the blame at the door of the business he bought from Ernst & Young, but Hermelin’s suggestion that client dissatisfaction with ‘arrogant’ consulting firms was one of the reasons for the decision hardly reflected well on the E&Y part of the organisation.

But it was the ban slapped on E&Y that prevents the firm from taking on any new listed audit clients in the US for six months that will be the most problematic.

Judge Brenda Murray ruled last Friday that E&Y had violated regulations in its relationship with software developer PeopleSoft between the mid-1990s and 2000. She also served a ‘cease and desist’ order on the firm, demanding no future regulation violations, and ordered it ‘disgorge’ (give up, to the rest of us) $1.7m in audit fees plus interest.

The firm put a brave face on the findings, ruling out the possibility of an appeal and promising to work closely with outside consultants and the SEC to ensure the ruling is adhered to. But it was a monumental blow to its credibility, not just Stateside but worldwide. It’s going to take some hard work for E&Y to dig itself out of this one.

Whatever the outcome of the Equitable Life ordeal – settlement or court case – the publicity will hurt the firm. And while the loss of the E and the Y from the Cap Gemini name is unlikely to have any material effect, the PeopleSoft debacle will linger longer in the minds of regulators, lawmakers and prospective clients.

In a letter to clients posted on its website on Sunday, Ernst & Young stressed: ‘None of our people, as individuals, are the subject of any sanction imposed by the judge.’ And the letter added: ‘We are not barred from accepting new privately held audit clients.’ But it was clutching at straws.

This is a ruling that will have deep implications for the firm’s reputation and, as is always the case with these things, for the profession at large.

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