British firm Ernst & Young accused of 'professional malpractice'

One of Britain’s biggest companies could face legal action over the $700 billion collapse of Lehman Brothers, a scathing report revealed today.

Accountancy giant Ernst & Young failed to challenge the book-keeping 'gimmicks' the American investment bank was using to stay afloat, according to report author Anton Velukas.

He concludes that the British firm been 'negligent' and that Lehman could pursue claims against the firm for 'professional malpractice'.

It is also revealed that one of the UK's leading law firms gave Lehman the green light to use the accountancy gimmick - known as 'Repo 105' - in the first place. Linklaters provided an opinion letter which allowed the US investment bank to exploit the accountancy loophole and 'lose' $50 billion from its balance sheet. New York lawyers had previously refused to approve the procedure. The collapse of Lehman triggered a catastrophic worldwide recession....

Wrong thinking. The Underwriter Laboratory gets paid by large companies to test appliances to see if they are UL compliant. A UL tag gives consumer confidence that the appliance meets minimum consumer safety standards. You do not see UL cave in to client pressures because the mindset of its management is consumer safety first and not hefty fees. Furthermore UL was found by consumer advocates and not high risk financiers. Though UL must make a profit like Wall Street firms, its founding mindset and corporate culture is different. UL knows that they will have to explain to the consumer and government how they rated an appliance UL compliant if it fails miserably in people’s homes. Wall Street needs to be held to the same standard, atleast a faulty appliance will burn one house down, malfeasant CEO actions can destroy an entire global economy

To Niuhuru:

Better writeup: Will Ernst & Young Survive The Lehman Fiasco?

Ernst & Young is standing behind the work it did for Lehman Brothers.
But the example of what happened to Enron accountants Arthur Andersen should have E&Y very worried.
In both its public statement released today and in interviews with the bankruptcy examiner, E&Y says it agreed to the Repo 105 transactions only in theory. It apparently never blessed or even evaluated any particular transaction, much less audited them or assessed the impact of them on the balance sheet.
The examiner says that the firm may nonetheless have committed professional malpractice.
The Examiner concludes that sufficient evidence exists to support colorable claims against Ernst & Young LLP (“Ernst & Young”) for professional malpractice arising from Ernst & Young’s failure to follow professional standards of care with respect to communications with Lehman’s Audit Committee, investigation of a whistleblower claim, and audits and reviews of Lehman’s public filings.

Interpretation: Smells a lot like lawyers posturing for future litigation using smear tactics

For EY to be held liable for the demise of the entire real estate market for a theory they never approved, applied to any transaction, or expressed an audit opinion on is absurd.

It's sort of like a doctor being charged with malpractice for thousands of patients he never saw for thinking an experimental drug, later found to have serious side effects, might have therapeutic value, even though the physician never once prescribed the medicine.

To mgstarr:

I’ve had to work with a lot of Big 8/6/? audit firms and found them to be almost as worthless as BOD’s.

I've worked with all of the Big 8/6/4 accounting firms, as well as all of their consulting spin-off's, domestically and internationally for more than 35 years.

I've always found them to be competent, qualified, professional and independent. From time to time they do make mistakes, and from time to time they become embroiled in "situations" they should have avoided. But all things considered, they do an excellent job of interpreting incredibly complicated financial accounting and tax regulations and evaluating amazingly complex transactions.

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