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Ernst and Young face lawsuit for Lehman's collapse





menino
As per the article below, I think Auditors still have an issue, and I think a lot of major institutions are using this to hide or write-off bad decisions. The way auditors and financial institutions work will have to change otherwise its another bubble thats waiting to burst.


Quote:
Linklaters and Ernst & Young face action over Lehman Brothers collapse

Alexandra Frean, Alex Spence



Two of the City’s biggest names were battling last night to protect their reputations after an explosive new report on the collapse of Lehman Brothers threatened both with potentially crippling lawsuits.

Linklaters, one of the world’s premier law firms, and Ernst & Young, the accountancy giant, were both criticised in an investigation that accused the latter of “professional malpractice”.

It has emerged that a whistleblower at Lehman, whose collapse in 2008 defined the credit crunch, repeatedly warned auditors about the use of acounting methods that removed debt from its balance sheet.

Matthew Lee, a senior vice-president at the firm, sent a letter to managers on May 16, 2008, four months before the bank’s collapse. He warned that the use of “Repo 105” transactions to conceal the parlous state of the company’s balance sheet could be unethical.

Ernst & Young, Lehman’s auditor, investigated the claims and were advised by Mr Lee less than a month later that Lehman used $50 billion of Repo 105 transactions temporarily to move bad loans — which it classes as assets — off their balance sheet, effectively concealing much of its debt. A series of lawsuits is expected after the report into the collapse accused the accountant of taking no action.

The report is by Anton Valukas, of Jenner & Block, who was appointed as examiner by the judge handling the bankruptcy to investigate any potential fraud or mismanagement. His 2,200- page report examines in detail the actions that led to Lehman’s demise.

When Lehman filed for bankrupcty on September 15, 2008, with about $600 billion in debt, its collapse contributed to the freezing of credit markets worldwide and to the global recession.

The Valukas report paints a damning picture of the bank’s final two years, branding it a hothouse institution so obsessed with growth that senior executives said openly that they did not want to hear “too much detail” about the risks they might face in case it held them back.

While Mr Vulakas found that Dick Fuld, Lehman’s chief executive, and other senior executives may have been unwise and shown poor judgment in their attitude to risk, he concluded that their actions in this regard were not so “reckless and irrational” as to give rise to a breach of fiduciary duty.

But his finding that they may have a case to answer on the Repo 105 transactions is expected to fuel litigation against the bank and its accountants.

Most notably, the report concludes that Ernst & Young was wrong to agree to the bank’s misleading accounts, knowing what it did about the Repo 105 transactions.

“Colorable claims exist that Ernst & Young did not meet professional standards, both in investigating Lee’s allegations and in connection with its audit and review of Lehman’s financial statements,” the examiner said.

He said “colorable” meant a claim for which there was enough credible evidence to support a finding in court. As for Mr Fuld, he was “at least grossly negligent” for allowing the firm’s continued use of Repo 105 transactions in this way, Mr Valukas concludes.

“Unbeknownst to the investing public, rating agencies, government regulators, and Lehman’s board of directors, Lehman reverse engineered the firm’s net leverage ratio for public consumption,” Mr Valukas states.

Mr Fuld’s lawyer said last night that the former Lehman boss did not know what the Repo 105 transactions were or their accounting treatment.

The report also names Christopher O’Meara, Lehman’s head of risk, and two former chief financial officers, Erin Callan and Ian Lowitt. The report reveals that they were also warned by Martin Kelly, Lehman’s former global financial controller, that the lack of economic substance to Repo 105 transactions meant “reputational risk” to Lehman if their use became known.

The report also reveals that Linklaters approved the Repo 105 transactions for Lehman, after the bank was unable to find any US lawyers willing to do so.

A spokesman for Linklaters confirmed that the firm gave Lehman its legal opinion on several transactions, but said it was not aware of any “facts or circumstances that would justify any criticism”. He added: “The examiner, who did not contact the firm during his investigations, does not criticise those opinions or say or suggest that they were wrong or improper.

Mark Molumphy, a partner at Cotchett Pitre & McCarthy, a San Francisco firm that is representing local authorities in California that lost more than $200 million after Lehman Brothers collapsed, said that the report unveiled a lot of new evidence in support of his clients’ claims — particularly internal documents and e-mails.

A court hearing on April 1 will be held to decide whether all of the documents referred to in the report can be made public. At present they are being held back on legal technicalities.

Mr Molumphy said his firm would go to court on Monday to amend its claim to include fresh evidence uncovered by Mr Valukas’s investigation.

A separate class action case brought by a Scottish pension fund in New York is also likely to be strengthened by the findings. The Lothian pension fund, which handles £3 billion in retirement funds belonging to local govenrment workers in Edinburgh, is acting as lead claimant on behalf of investors that lost money on Lehman-related sub-prime investments. Its lawyers declined to comment last night.

As for Ernst & Young, it could now face attempts by investors to claw back the fees it pocketed for auditing Lehman Brothers’ books — $31 million in 2007 alone — in addition to claims for substantial damages.

A spokesman for E&Y said: “Lehman’s bankruptcy, which occurred in September 2008, was the result of a series of unprecedented adverse events in the financial markets. 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.”

Ernst & Young declined to comment further. Privately, the firm is understood to be determined to defend itself against any follow-on action. It will be conscious of the destruction of Arthur Andersen, an erstwhile rival as a global auditor, by its involvement in the fall of energy company Enron.

Full report: http://lehmanreport.jenner.com


source = http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article7060424.ece
deanhills
menino wrote:
It has emerged that a whistleblower at Lehman, whose collapse in 2008 defined the credit crunch, repeatedly warned auditors about the use of acounting methods that removed debt from its balance sheet.
Interesting article menino. Wonder how many companies have been using this accounting method? Looks as though auditors are party to the non-transparency of financial statements. Good that they will be taken to court, as possibly it is going to open a whole can of worms that may point fingers at other corporations who have been using the same method.
hunnyhiteshseth
i dont know how many companies do so, but if i had to guess i would say most of them may be doing so, its just the matter of who got caught.
deanhills
hunnyhiteshseth wrote:
i dont know how many companies do so, but if i had to guess i would say most of them may be doing so, its just the matter of who got caught.
Not to foget the Governments as well! I'm almost pretty sure that they are using the same accounting methods to minimize debt. Perhaps at one time, before Lehman Brothers collapsed, this was thought of as brilliant accounting?
Sad
Wonder how many financial directors of large corporations are shivering in their boots right at this moment?
hunnyhiteshseth
deanhills wrote:
hunnyhiteshseth wrote:
i dont know how many companies do so, but if i had to guess i would say most of them may be doing so, its just the matter of who got caught.
Not to foget the Governments as well! I'm almost pretty sure that they are using the same accounting methods to minimize debt. Perhaps at one time, before Lehman Brothers collapsed, this was thought of as brilliant accounting?
Sad
Wonder how many financial directors of large corporations are shivering in their boots right at this moment?


Yes exactly. Governments are also known to show reduced budget deficit by moving many important things into "off-budget expenses" category!
menino
No wonder most goverments are corrupt. Laughing
I think that if they think they can get away with financial debt and no one's looking, they might as well get away with a whole lotta other stuff. Surprised

Well, hopefully financial stability will be better soon, but I'm still wondering how Auditors and auditing companies let this through.
I do believe that even banking institutions might have known about this, bit no one bothered untill recently to revise it... and who knows really how many institutions will have revised their curriculum based on this ? Shocked
hunnyhiteshseth
menino wrote:
No wonder most goverments are corrupt. Laughing
I think that if they think they can get away with financial debt and no one's looking, they might as well get away with a whole lotta other stuff. Surprised

Well, hopefully financial stability will be better soon, but I'm still wondering how Auditors and auditing companies let this through.
I do believe that even banking institutions might have known about this, bit no one bothered untill recently to revise it... and who knows really how many institutions will have revised their curriculum based on this ? Shocked


Basically sometimes these 'accounting creativities' are so complex that even with your best intentions you cannot actually catch them.
Regarding the curriculum, well, I have at my university a half-credit course on financial shengians only where all these techniques and how to catch them are discussed.
deanhills
hunnyhiteshseth wrote:
well, I have at my university a half-credit course on financial shengians only where all these techniques and how to catch them are discussed.
Now, that would be a course that I would like to attend! I find it totally mind boggling, that the "vanguards" of financial rules, should exploit those rules for hiding debt. There has to be something really unethical here, and that one has to wait until there is a disaster, before people are rapped over the knuckles for having them. Almost like the more people are jumping up and down and shouting "transparency please", the more murky it gets.
hunnyhiteshseth
deanhills wrote:
hunnyhiteshseth wrote:
well, I have at my university a half-credit course on financial shengians only where all these techniques and how to catch them are discussed.
Now, that would be a course that I would like to attend! I find it totally mind boggling, that the "vanguards" of financial rules, should exploit those rules for hiding debt. There has to be something really unethical here, and that one has to wait until there is a disaster, before people are rapped over the knuckles for having them. Almost like the more people are jumping up and down and shouting "transparency please", the more murky it gets.


My university accepts foreign exchange students.. :p ... lolz.. Laughing
deanhills
hunnyhiteshseth wrote:
deanhills wrote:
hunnyhiteshseth wrote:
well, I have at my university a half-credit course on financial shengians only where all these techniques and how to catch them are discussed.
Now, that would be a course that I would like to attend! I find it totally mind boggling, that the "vanguards" of financial rules, should exploit those rules for hiding debt. There has to be something really unethical here, and that one has to wait until there is a disaster, before people are rapped over the knuckles for having them. Almost like the more people are jumping up and down and shouting "transparency please", the more murky it gets.


My university accepts foreign exchange students.. :p ... lolz.. Laughing
OK, they do the course, and then what? Smile Do the people who take the courses go back to Government to try and change the accounting so that all the stats become transparent, or do those with the knowledge just become more cynical?
hunnyhiteshseth
deanhills wrote:
hunnyhiteshseth wrote:
deanhills wrote:
hunnyhiteshseth wrote:
well, I have at my university a half-credit course on financial shengians only where all these techniques and how to catch them are discussed.
Now, that would be a course that I would like to attend! I find it totally mind boggling, that the "vanguards" of financial rules, should exploit those rules for hiding debt. There has to be something really unethical here, and that one has to wait until there is a disaster, before people are rapped over the knuckles for having them. Almost like the more people are jumping up and down and shouting "transparency please", the more murky it gets.


My university accepts foreign exchange students.. :p ... lolz.. Laughing
OK, they do the course, and then what? Smile Do the people who take the courses go back to Government to try and change the accounting so that all the stats become transparent, or do those with the knowledge just become more cynical?


Hahaha, i do not know. The university only provides knowledge, what they do with it is not in the knowledge's control. But, I huess some would land up in a position with government.
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