Did Ernst & Young Help Lehman Brothers Broil Its Books?

by Derek Loosvelt | December 20, 2010

Didn't I just predict that an accounting firm would be going down?

I admit, though, that I figured one of the Big Four would go down in the first or second quarter of 2011, not by the end of 2010.

At any rate, it sure does sound like outgoing New York Attorney General and New York State Governor-Elect Raggedy Andy Cuomo has a rather good case against Ernst & Young, the accounting firm that allegedly helped Dick Fuld and the rest of the Brothers named Lehman cover a healthy portion of its debt-ridden tracks. From today's Wall Street Journal:

The Lehman bankruptcy examiner's report also stated that there may be evidence to support negligence and malpractice claims against Ernst & Young regarding Lehman's audits and its lack of response to a whistle-blower at Lehman who raised red flags about the repo trades.

The whistle-blower was Matthew Lee, a Lehman Brothers senior vice president. He had complained to his boss, and eventually wrote a letter in May 2008 to senior Lehman executives expressing concern that the Repo 105 transactions [a form of short-term borrowing that allows banks to take bigger trading risks ... some banks have systematically lowered their repo debt at the ends of fiscal quarters, making it appear they were less risk-burdened than they actually were most of the time] violated Lehman's ethics code by misleading investors and regulators about the true value of the firm's assets. Days later, Mr. Lee was ousted from the firm.

According to the Lehman bankruptcy examiner's report, Ernst & Young auditors saw the letter, and later interviewed Mr. Lee after he was let go from Lehman. Ernst & Young previously said in a statement that Lehman management determined Mr. Lee's "allegations were unfounded." Mr. Lee couldn't be reached for comment.

(WSJ)

Filed Under: Finance


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