By Shahien Nasiripour in Washington

Ernst & Young has been hit with a record $2m fine for failing to properly audit a pharmaceutical company?s annual financial statements and disregarding its own internal policies.

The penalty, levied as part of a settlement with the US Public Company Accounting Oversight Board, is double the previous record, a $1m fine in 2007 against Deloitte & Touche.

Four E&Y partners on the 2005, 2006 and 2007 annual audits of Medicis Pharmaceutical were sanctioned. Two of them were barred from working for registered accounting firms.

E&Y, the company?s outside auditor for more than 20 years, did not admit or deny the allegations. It said: ?We have implemented changes to our policies and procedures that directly address the PCAOB?s concerns and will enhance quality in the future.? It declined to elaborate.

The crackdown comes as the accounting watchdog ramps up its enforcement efforts against audit firms, levying higher penalties and publicly identifying auditors who run foul of accounting rules. The watchdog had wanted to publicise the E&Y case earlier last year, but the companies objected, officials said.

?These audit partners and Ernst & Young . . . failed to fulfil their bed-rock responsibility?, said James Doty, PCAOB chairman. They did not ?exercise professional scepticism?, he added.

The fine was sparked by a routine 2008 inspection.

PCAOB inspectors noticed that E&Y had failed to properly evaluate Medicis?s accounting of its sales returns reserve, a material component, officials said. E&Y agreed that the company?s accounting did not conform with US generally accepted accounting principles (GAAP). Medicis subsequently filed restated financial statements.

Shortly thereafter, inspectors discovered that an internal review at E&Y determined that E&Y?s original rationale for allowing Medicis to account for its sales returns reserve using allegedly improper methods conflicted with both GAAP and E&Y?s internal procedures, PCAOB said.

However, E&Y found a different rationale to support Medicis?s accounting manoeuvre.

Inspectors subsequently referred their findings to the watchdog?s enforcement staff.

The audit violations ?are particularly troubling because, when the firm identified the problem itself in 2006 . . . it failed appropriately to address a material departure from GAAP,? said Claudius Modesti, PCAOB?s director of enforcement.

An official added: ?The fine underscores the severity of the audit failure and sends a message to the profession.?

? The Financial Times Limited 2012