A report from the Bank of England has labeled the accounting used at the
heart of Lehman collapse as “window dressing”, warned that it should be avoided
and that auditors might have to be more involved in reporting suspect
The Bank’s half-yearly
Stability Report said: “Reliance on end-period information can also provide
incentives for banks to ‘window dress’ their accounts”
It added: “Lehman Brothers provides an example of window dressing in
practice. The Lehman Brothers Examiner’s Report highlighted the use of an
accounting device known as Repo 105.”
The Bank suggests in its report that banks should be reporting more detail on
their activites between year-ends as a means of catching the kind of
transactions undertaken by Lehmans to improve its balance sheet.
But the bank also suggests a greater role for auditors.
“More radically, auditors could be given an explicit responsibility to check
for and report on signs of window dressing.
“If it becomes clear that disclosure repeatedly does not comply with
accounting and regulatory standards, or banks are undertaking actions that
distort their financial reports, explicit sanction on banks and their board,
could be considered by regulators.”
There has already been discussion about creating more structured
communication between regulators and auditors but the Bank’s proposal seems to
go much further.
Ernst & Young was highly criticised for its role in auditing Lehman in
the bankruptcy examiner’s report published in the US which also brought
attention to the use of Repo 105 transactions and the accounting.
In the UK the professional disciplinary body, the AADB, has opened an
investigation of Ernst & Young over the Lehman audit.
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