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On the money

Ernst & Young will defend its position after bankruptcy examiner's report on Lehman Brothers' collapse points finger at the auditor

Who knows what will happen to the Lehman directors and Ernst & Young in
the wake of the bankruptcy examiner’s report and its damaging criticism of their
conduct in connection with the bank’s accounting. The short answer to that is,
nobody yet – though the report’s 2,000 pages certainly laid out a case for
further action against them through legal action. Accusing anyone of negligence
will always cause key parties to begin discussion about the next course of
action. That could be a claim for damages in the US courts. Some will ask if it
should go further.

E&Y will defend its position vigorously. The early statements already
indicate that, but the report appears to show the case is arguable. That would
rest on the auditor saying it only considered the accounting treatment in the
abstract and that it was not their job to consider the intent behind the
accounting, or the timing. No client would come forward to an auditor with the
kind of intent claimed by the bankruptcy examiner.

However, the sums involved will create the impression that some grasp of the
significance of the treatment should have been reached. Even so, an auditor can
argue it is only there to consider if the treatment is within the rules and we
should not assume E&Y are completely without a defence. Even the examiner
accepts that.

Of course that also means action against the firm will be bitterly contested.
And it will happen in the US. Whatever happened here in the UK, what will really
count is where the audit was signed off – and that was across the Atlantic. That
means its possible that, if further action follows, it could be for a
considerable sum – the kind of sum that could end a firm. That’s a scary
prospect for the profession but the case will provoke much more debate about
accountancy and its role. Once again, the profession is at the heart of a
controversy, we’ve been here before, and the soul searching will begin in
earnest again.

Gavin Hinks is editor of Accountancy Age

Further reading:

Lehman smoking gun leaves E
&Y facing questions

Leader – audit’s big
question

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