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Ernst & Young faces new investigation over Lehman audit

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16th Jun 2010
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Disciplinary body launches probe into the firm’s audit of Lehman Brothers, including the use of so-called ‘accounting gimmicks’.

The Accountancy and Actuarial Disciplinary Board (AADB) announced that it had begun an investigation into the conduct of Ernst & Young LLP as auditors to the now collapsed bank.

A recent US court examiner’s report accused senior management of “actionable balance sheet manipulation” and using “accounting gimmicks” to cover up the failing bank’s losses.

The bank employed off‐balance sheet devices, known within Lehman as Repo 105 and Repo 108 transactions, to temporarily remove securities inventory from its balance sheet, a tactic which was used to create a “a materially misleading picture of the firm’s financial condition in late 2007 and 2008”, said court examiner Anton Valukis.

As well as delving into the use of ‘repo’ transactions, the AADB investigation will also focus on Ernst & Young’s last audit of Lehman’s US and UK operations for the fiscal year ending 30 November 2007.

A spokesperson for Ernst & Young said: “Ernst & Young’s audit opinion stated that Lehman’s financial statements for that year were fairly presented in accordance with the relevant accounting standards, and we remain of that view. We will cooperate fully with the AADB investigation”.

The AADB is part of the Financial Reporting Council. If the investigation results in a formal disciplinary complaint the maximum penalties include an unlimited fine and, for individuals, the loss of a licence or practising certificate.

It’s yet another piece of bad news for Ernst & Young, which earlier this month was fined £500,000 following a decade long investigation into its audit of Equitable Life.

 

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