Tuesday, March 16, 2010

Update. Maybe some wiggle-room for Ernst & Young with regard to Lehman

A little more info regarding Lehman's nasty "Repo 105" activities.  I mentioned yesterday that E&Y might be in a "world of hurt" due to their reluctance to press this accounting issue with Lehman's top brass.

One thing working is Ernst & Young's favor actually works against the rest of us.  The Lehman repo activities are being scrutinized because they moved assets off the balance sheet at quarter-end, rather than year-end.  My accountant friend pointed out to me that E&Y's legal defense could be that 10q (quarterly) reports are only "opinions," rather than  annual 10k's that are "audits."  

It's conceivable that Lehman's last audited results - which would have been in 2007 - may not have had the repo-105 activities in them, or at least to the extent they were used as the firm crumbled in 2008.  If they were used to falsify Lehman's balance sheet in the months leading up to its collapse, well E&Y might very well say "Sorry folks, but those were just opinions, not audits."

Taking a step back, what a business public accounting is!  Charge tens of millions in fees, while three of four quarters' financial statements carry no risk to you, despite millions of investors relying on them.

A peek at a recent Dell (DELL) 10q shows the word "unaudited" used 33times.    

Copyright 2010 AlphaNinja

1 comment:

  1. Another thing that works in E&Y's favor is that PwC might have been guilty too: http://www.jrdeputyaccountant.com/2010/03/did-pwc-keep-ernst-youngs-lehman.html

    Let's face it, like you said, public accounting is kind of a joke at this point.

    But GAAP is not up for creative interpretation - in any other industry, if procedure (i.e. end of the year v end of the quarter) had been neglected slightly along the way, it's probably not too huge of a deal. In auditing and financial reporting, it's all or nothing. Either the statements are prepared in accordance with GAAP or not. Sure, there's a little smudgy grey in between but you get the point.

    It may not be the total beat-down some of us immediately assumed it would be for E&Y but it certainly won't be pretty.