The UK's reporting regulator said it will investigate the accounting treatment of Repo transactions which were at the centre of professional negligence claims directed at Big Four firm Ernst & Young and their audit of collapsed bank Lehman Brothers.
The Financial Reporting Council said it would ascertain the facts "on how the 'Repo' transactions were accounted for and audited in the UK in order to determine any implications".
The board said it would speak with Ernst & Young, who last Thursday were accused of professional negligence, and failing to challenge Lehman Brothers' use of repo transactions in the years before its collapse.
The firm said at the time it stood by its audit decision. Yesterday it said it would "cooperate fully with all relevant parties on this matter".
Repo transactions are used by banks to swap assets for short term cash. Lehman Brothers was accused of using the transactions and the accounting treatment to artificially distort their balance sheet.
To say FRC will look into this implies many months before reaching a conclusion. The 2,000 odd page report already addresses these and all this is just a waste of time and money. There will be litigants who will push E & Y to defend itself and that more than anything will bring about how the "window dressing" was allowed to progress. We are all taught early in our professional life to watch out for these. For a big major firm to allow it to happen is to let the whole profession down and with it reduce the important role we have all come to play in business life.
Posted by: Arvind Shah, 16 Mar 2010 | 00:00
I am an EY alumni and can confidently say EY's audit methodology is one of the best and its audit of Lehman brothers was in accordance with the regulatory environment in place. Repo's are different from classic window dressing which all students of audit are taught to identify. It is easy to blame auditors, when the regulator's threw professional judgement and replaced it with compliance based box ticking i.e. principles were sacrified at the alter of rules post-Enron.
Posted by: Mohamed Ebrahim, 19 Mar 2010 | 00:00
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