Lehman administrators consider damning report

PwC, administrators of Lehman Brothers European business, is considering its
next move in the wake of a damning report which criticises accounting policies
at the investment bank and the role of auditors Ernst & Young.

A senior figure close to the administrators confirmed they had the option to
pursue the auditors through the courts if they concluded there was a case to
answer.

Accountancy Age understands PwC administrators are considering the
report and their next steps.

The source said the issue was “too complex” to provide a snap judgement.

Administrators will take their time to digest the facts contained in the
2,200 page dossier before deciding whether to take the matter to court.

A report for the US Bankruptcy Court released late on Thursday accused E
&Y of being “professionally negligent” in its audit of the collapsed banking
giant.

E&Y dispute the allegations.

The report centred on the use of so called repo transactions, used to move
high risk assets off its balance sheet.

It claimed the transactions – known as Repo 105s – had no economic substance.

PwC is continuing its attempts to claw back cash for creditors of Lehman
Brothers European arm. Administrators have already returned $13.3bn (£8.8bn) to
creditors, as of September last year.

Ernst & Young said in response to the publication of the report:

“Lehman’s bankruptcy, which occurred in September 2008, was the result of a
series of unprecedented adverse events in the financial markets. 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 Generally Accepted Accounting Principles (GAAP), and we
remain of that view.

“After an exhaustive investigation the Examiner made no findings in his
report that Lehman’s assets or liabilities were improperly valued or accounted
for incorrectly in Lehman’s November 30 2007 financial statements.

“The leverage ratios that were reported in Lehman’s Management’s Discussion
and Analysis (MD&A) were the responsibility of management, not the auditor.
They are not part of the audited financial statements.”

This would not be the first time administrators have gone after the auditors
of a collapsed company.

In 2005, PwC sued auditors KPMG for negligence over the collapse of insurance
giant Independent Insurance. The case was settled out ofcourt.

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