New York’s State Attorney General is close to filing fraud charges against Ernst & Young’s US firm (E&Y), focusing on its approval of “repo” transactions in the years leading up to the collapse of US bank Lehman Brothers, The Wall Street Journal reports.
The case follows on from a March report which heavily criticised E&Y’s audit of repurchase transactions or “repos” – a type of short term loan used to quickly raise capital.
Attorney general Andrew Cuomo was said to be close to beginning court proceeedings in a move which represents the first time a major accounting firm will be tried by state-backed prosecutors in connection with a banking collapse connected to the crisis.
Court appointed examiner Anton Valukas found the bank used the transactions, known internally as Repo 105s, to shift $50bn (£34bn) from its balance sheets during sensitive reporting periods. Valukas claimed Lehman Brothers accounting model, which recognised the transactions as sales and not loans, was used by the bank to manipulate its market position.
The transactions were funneled through Lehman’s UK arm, which is now in administration. The Financial Reporting Council (FRC) also launched an earlier investigation to “ascertain the facts” on how repo-transaction were audited. The UK’s accounting watchdog, The Accountancy & Actuarial Discipline Board, is also investigating the issue.
E&Y has consistently defended its audit throughout and said it stands by the work it did for the bank and said it would co-operate with regulatory investigations.