Ernst & Young Pays $10 Million To Settle Lehman Brothers Audit Failure Lawsuit

[TexasTowelie]

Ernst & Young, one of the Big Four auditing firms, has agreed to pay a $10 million to New York state to settle a lawsuit for overlooking accounting gimmicks by Lehman Brothers, the defunct Wall Street bank. The scheme allowed Lehman to hide billions of dollars in bad deals.

“If auditors issue opinions that are unreliable or provide cover for their clients by helping to hide material information, that harms the investing public, our economy, and our country,” Eric Schneiderman, attorney-general of New York state, said in a public statement issued after the settlement. “Auditors will be held accountable when they violate the law, just as they are supposed to hold the companies they audit accountable.”

Back in 2001, Lehman Brothers bankers dreamed up a scheme that they named Repo 105 to temporarily “sell” bad debts on condition that they would repurchase them a week to ten days later. The term Repo is derived from “repossess” and 105 referred to the five percent premium it paid for the service, as opposed to the usual two percent. With the worst deals taken off their balance sheet, the bank appeared more financially healthy than it actually was.

Buyers of Repo 105 included Barclays of the UK, KBC Bank of Belgium, Mizuho Bank and Mitsubishi UFJ Financial Group of Japan, and UBS of Switzerland. But Lehman Brothers ran into problems with this novel technique since no U.S. law firm would sign off on this scheme as a “true sale.” In order to get approval, the bank turned to Linklaters, one of the top five UK law firms to do so instead.

Read more: http://www.corpwatch.org/article.php?id=16019

[font color=green]While I was working in the insurance industry I went through an audit by Ernst & Young. The audit had no possibility of determining any fraudulent activity and mostly an exercise in paper shuffling. I also had the opportunity to double-check some financial data that was provided to me and their data was off by about 60% from what they said it represented. In other words, the financial guarantees that their audits provide are worthless.[/font]

[TexasTowelie]

1. Reading the article in further detail,

E&Y paid $99 million in a separate lawsuit along with the $10 million fine on business that brought in $150 million to E&Y. So they managed to make about $40 million. Subtract a few million for the legal fees defending the lawsuit and negotiating the fine, then add a few million that they made in investment income and it still amounts to a profit for E&Y. So what will stop them from doing something similar in the future?

[Wellstone ruled]

2. Just another Rubber Stamp Accounting Firm.

Heard similar things from Accounting Firm customers of mine. Kind of a laughing stock joke in the early 2000's. Doubt if they have improved their reputation lately.