E&Y at risk over Lehman's 'accounting gimmicks'

Deceptive accounting practices and lax auditing lay at the heart of the 2008 collapse of US investment bank Lehman Brothers that helped to trigger the global economic crisis, says a US court examiner’s report.

Ominously for Ernst & Young, the report said the stakeholders in Lehman's remains may be able to seek compensation from the auditors for fees and expenses incurred "as a result of Ernst & Young's malpractice - for example, if an accountant’s negligence in the preparation or certification of financial statements results in litigation against the accountant’s client brought by purchasers of the client’s securities, the client may be able to recover the expenses of the litigation and the amount of any judgment or reasonable settlement.”

Anton Valukis’ 2,200-page forensic report (2.3MB PDF) accused senior management of “actionable balance sheet manipulation” and using “accounting gimmicks” to cover up the failing bank’s losses.

It has been reported today the bank was in fact insolvent for weeks before filing bankruptcy in 2008.

“Lehman employed off‐balance sheet devices, known within Lehman as Repo 105 and Repo 108 transactions, to temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days, and to create a materially misleading picture of the firm’s financial condition in late 2007 and 2008,” said the report.

In a statement delivered today, Ernst & Young said: "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 Financial Reporting Council has issued a statement which reads: "Following the publication of the recent report on Lehman Brothers, the FRC is ascertaining the facts on how the “Repo” transactions were accounted for and audited in the UK in order to determine any implications. To that end, we have asked Ernst & Young to provide further information in relation to what happened in the UK".

Lehman collapse: The story so far