Report claims E&Y knew about Repo transactions

Ernst & Young's US arm was aware of Lehman Brothers practice of offloading liabilities, a central plank to the banks' alleged attempts to hide its true financial position, a report released has claimed.

In a report for the United States Bankruptcy Court, examiner Anton Valukas, claims Lehman took advantage of repo-transactions - used to quickly raise funds for a fixed period - to temporarily remove assets from its balance sheets.

William Schlich, E&Y’s lead partner on the Lehman audit team, said he was aware of the transactions, known in Lehman as Repo 105, but did not approve or set it up, according to the report.

“According to Schlich, Ernst & Young had been aware of Lehman’s Repo 105 policy and transactions for many years,” the report states.

Ernst & Young’s view on the transactions was allegedly not based on whether it complied with guidelines, “rather, Ernst & Young’s review of Lehman’s Repo 105 Accounting Policy was purely ‘theoretical’,”, the report states.

Lehman allegedly manipulated a techincal definition of a sale to temporarily displace its liabilities, which resulted in billions of pounds in liabilities being removed from its balance sheet in the years leading up to its collapse.

Valukas team asked Schlich whether, as part of its responsibility to ensure Lehman’s financial statements were not materially misstated, Ernst & Young should have “considered the possibility that strict technical adherence to accounting rules could nonetheless lead to a material misstatement in Lehman’s publicly reported financial statements,”.

"Schlich refrained from comment", according to the report.

In a statement Ernst & Young said: "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 US Generally Accepted Accounting Principles, and we remain of that view."

E &Y "negligent" in Lehman audits, report claims