Recruiter Reveals Probe by the SEC

Korn/Ferry International said Monday that the Securities and Exchange Commission was conducting an informal inquiry into a potential conflict of interest involving a former director of the executive recruiting firm and its outside auditor.

Korn/Ferry said the SEC was looking into payments made by Ernst & Young to a company owned by Mark C. Thompson, who had been on the Korn/Ferry board. Ernst & Young paid Thompson’s company $377,500 plus expenses over a two-year period ended in April for services the company provided, Korn/Ferry said in a regulatory filing.

Thompson didn’t seek reelection to the board at the annual meeting in September.

In May, he resigned from the board of Best Buy Co. because of a possible conflict of interest in the dealings between his company and Ernst & Young, which is also Best Buy’s outside auditor.

Don Spetner, a spokesman for Los Angeles-based Korn/Ferry, said the company was confident that Ernst & Young’s audits weren’t affected by its business relationship with Thompson.

“We believe E&Y;’s independence ... has not been impaired,” Spetner said.

Until recently, such business relationships were rarely scrutinized.

“It’s quid pro quo, the way business has been done for years, and it is still being done,” said Barbara Lougee, an accounting professor at UC Irvine’s Graduate School of Management. “The only difference now is that when it becomes known and involves a public company, the SEC has taken a keen interest in the lack of independence between auditing firms and the companies being audited.”

UBS analyst Kelly Flynn said that “even in a worst-case scenario,” the SEC investigation was “probably not going to have much impact on” Korn/Ferry.

Korn/Ferry’s stock has risen 20% this year as the economy has rebounded and companies have stepped up hiring. The stock climbed $1.40 on Monday to $15.98 on the New York Stock Exchange.

Analysts expect Korn/Ferry to report improved fourth-quarter earnings today of 13 cents a share, contrasted with a loss of 5 cents a share a year earlier.

“The labor market seems to be improving, and a number of other data points that we’ve seen in the marketplace indicate that the company will be reporting a pretty good fourth quarter,” Flynn said

The SEC inquiry, sources said, is more focused on Thompson’s service on Best Buy’s board than at Korn/Ferry. At Best Buy, Thompson sat on the discount retailer’s audit committee, which oversaw Best Buy’s dealings with Ernst & Young; Thompson wasn’t a member of the Korn/Ferry audit committee.

Thompson couldn’t be reached for comment.

In April, Ernst & Young was barred by an SEC administrative law judge from accepting new public-company audit clients for six months. The judge ruled that the firm had entered into an illegal business relationship with former client PeopleSoft Inc.

Ernst & Young, the third-biggest U.S. accounting firm, was required to pay a $1.7-million fine and to accept a monitor to oversee its compliance with independence rules.

Korn/Ferry has a commercial relationship with the SEC. It was hired last year to find 110 accountants for the regulatory agency and is under a contract that expires this month.

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Bloomberg News was used in compiling this report.