Ernst & Young faces fresh scrutiny into its audit of Lehman Brothers
after the UK’s accounting watchdog announced it would investigate the alleged
use of accounting gimmicks by the collapsed US bank.
The Accountancy & Actuarial Discipline Board (AADB) said it would probe
the final years before the bank’s demise, focusing on the use of particular
repurchase transactions, known within Lehman’s as Repo 105s, allegedly used to
displace assets during sensitive reporting periods.
In a statement, the AADB said it would investigate the conduct of E&Y
members in the audit of Lehman Brothers UK arm, Lehman Brothers International
(Europe). It will also investigate the treatment of Repo 105 transactions used
to shift $120bn (£79.6bn) off the bank’s balance sheet in the years leading to
The move follows a March announcement by the Financial Reporting Council
(FRC), which oversees the AADB, to “ascertain the facts” on how repo-transaction
The publication of US court appointed examiner Anton Valukas report in March
first brought to light Lehman’s use of Repo 105 transactions, and suggested
there may be colourable claims brought against E&Y. The firm has since been
named as a defendant in a US amended class action.
E&Y has defended its audit throughout and said it stands by the work it
did for the bank. In a statement, the firm said it would cooperate fully with
the AADB investigation.
Following the release of the Valukas report the US Securities and Exchange
Commission (SEC) wrote to two dozen US financial institutions seeking an
explanation of their use of similar repurchase transactions.
The US audit watchdog, the Public Company Accounting Oversight Board is also
widely believed to be investigating the audit, despite being legally bound from
commenting on active investigations.
A PCAOB investigation into Lehman’s UK activities risks being blocked by the
EU, which is trying to pressure the US into sharing confidential documents
amassed during its inspections of audit firms.
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