The audit and accounting giant Ernst & Young is being finally sued by the New York Attorney General, for its alleged role in the collapse of banking giant Lehman Brothers in 2008.
The Attorney General Andrew Cuomo said the accounting firm helped Lehman Brothers hide a ‘massive accounting fraud’. On its part, Ernst & Young said it will ‘vigorously defend’ itself.
Refuting the charges brought against it, the firm said: “There is no factual or legal basis for a claim to be brought against an auditor in this context. Lehman’s audited financial statements clearly portrayed Lehman as a highly leveraged entity operating in a risky and volatile industry”.
Mr. Cuomo however, begged to differ. “At a time when it was critical for investors to make informed decisions as to whether to keep or to buy Lehman, Ernst & Young assisted Lehman in defrauding the public”, the lawsuit alleges.
Experts think that the accounting firm may try to settle the case outside the court. Bruce Pounder, an accounting ethics expert and President of Leverage Logic said: “It tends to be lot less expensive for both parties to resolve it through settling and getting it behind them”.
The charges brought against E&Y are serious. Cuomo said the audit firm explicitly approved accounting fraud conducted by Lehman for seven years before it collapsed. The case is built on an USGAAP accounting technique known as Repo 105, under which the bank removed $50 billion from its balance sheet in 2008.
Condemning the move, Cuomo said: “This practice was a house-of-cards business model designed to hide billions in liabilities in the years before Lehman collapsed”.
A court appointed examiner has already blamed Ernst & Young as being ‘professionally negligent’ about nine months ago.
The latest lawsuit brings back the memories of the Enron Scandal, where the audit firm Arthur Anderson was indicted in a criminal proceeding. However, the state has filed a civil lawsuit against E&Y this time around.
London based E&Y is third largest audit firm among the ‘big four’, behind Deloitte and PwC and employs around 140,000 worldwide.