The 2,200 page report into the collapse of Lehman Brothers was released last week. Court-appointed examiner Anton Valukas’s main finding is that Lehman fiddled its books using a technique called Repo 105, which reduced reported leverage. The spotlight is now on Lehman’s auditor Ernst & Young (E&Y), which Valukas called “professionally negligent”. He suggested that there was enough evidence to bring a claim of malpractice against E&Y because it failed to disclose or investigate these deals.
What the commentators said
Eight years ago, Arthur Andersen “bit the dust” after the Enron scandal, said Lisa Buckingham in the Daily Mail, leaving just four big accountants. Andersen was found guilty of helping the energy trader hide its losses and shredding evidence. Could this affair sink E&Y? It looks “extremely damaging”; the report was a “blatant come-on to litigants”. E&Y is now facing “potentially crippling” litigation, agreed Alexandra Frean in The Times. Investors may also attempt to claw back the fees pocketed for auditing Lehman’s books. These reached $31m in 2007 alone.
E&Y’s reputation will be “heavily dented”, said Lex in the FT, but it seems likely to “get through the scandal intact”. The “window dressing” in question is not exclusive to Lehman, “nor, prima facie, illegal”. E&Y was not obliged to disclose any concerns. But once again, “the spirit of the rules has been side-stepped”, leaving investors “shaking their heads”.