Could Lehman be Ernst & Young's Enron?

Over the past few years, the firms have pushed for liability caps on litigation and settled dozens of cases, all amid concerns that each of the “Big Four” accounting firms faces potential litigation from undetected frauds at large public companies that could destroy them.

Ernst & Young became the latest auditor to come under fire this week after the court-appointed examiner in the Lehman Brothers Holdings Inc bankruptcy said the audit firm did not challenge accounting gimmicks that allowed Lehman to hide some $50 billion in assets in 2008, while claiming it had reduced its overall leverage levels.

“As an auditor, you’re always concerned when you’re auditing a large company that ultimately fails,” said Lynn Turner, Managing Director in the forensic accounting practice at consulting firm LECG and former chief accountant of Securities & Exchange Commission.
“But a lot of those do occur where the auditors come out OK and the auditors aren’t at risk — obviously in this case the examiner thinks differently,” Turner added.
At issue is a repurchase and sale program called Repo 105, which Lehman used without telling investors or regulators, and the examiner concluded was used for the sole purpose of manipulating Lehman’s books.

In the examiner’s report Lehman executives described the Repo 105 as everything from “window dressing” and an “accounting gimmick” to a “drug.”

Accounting policies
According to the examiner’s report, Ernst & Young’s lead partner on the Lehman audit said the firm did not “approve” the Repo 105 accounting policies, but rather “became comfortable” with its use.

Lehman, which filed the largest US bankruptcy case in history on September 15, 2008, is likely to use some of the examiner’s claims to pursue lawsuits against those it believes are responsible for the investment bank’s collapse.
Bryan Marsal, Chief Executive of Lehman Brothers Holdings Inc and co-founder of restructuring firm Alvarez & Marsal, said through a representative that Lehman “will carefully evaluate it in the coming weeks to assess how it might help us in our ongoing efforts to advance creditor interests.”

Ernst & Young said in a statement: “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.” “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.”