Saturday, March 13, 2010

Auditing giant could face huge lawsuits over Lehman Brothers collapse

From New York comes word that Big Four accounting giant Ernst & Young could be facing huge liabilities for failing to recognize the perilous state of Lehman Brothers, the giant investment bank that collapsed in 2008 and set off the world financial crisis. A report Thursday from a court-appointed examiner overseeing Lehman's bankruptcy filing suggested that Ernst & Young was negligent or worse for not noticing that Lehman had been writing off assets using an accounting technique to lower its debt on paper, according to the Reuters international news service . In his report, the auditor, Anton Valukas of the Chicago-based Jenner & Price law firm, said Lehman's use of a sale and repurchase program called Repo 105 had no business purpose outside of hiding assets to make the investment bank appear less leveraged than it actually was. Lehman's 2008 bankruptcy filing, the largest in U.S. history, sent shockwaves through the world economy and could have triggered the global economic crisis. In a statement, Ernst & Young said it had done nothing wrong and bore no responsibility for what happened, even though it audited the company for 2007 and already was preparing for the year-end audit when Lehman collapsed. "Our last audit of the company was for the fiscal year ending November 30, 2007. Our opinion indicated that Lehman's financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view," the statement said. "After an exhaustive investigation the examiner made no findings in his report that Lehman's assets or liabilities were improperly valued or accounted for incorrectly in Lehman's November 30, 2007, financial statements." Valukas had stated in his report that the repurchase transactions at least contributed to Lehman's collapse, and that the company had "colorable claims" against Ernst & Young for not realizing the damage they were doing, Reuters said. The chairman of Lehman Brothers Holdings Inc., Bryan Marsal, told Reuters through a representative that the company would "evaluate" the report to see if "it might help us in our ongoing efforts to advance creditor interests."

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