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Lehman audit investigator takes no action against Ernst & Young

Category : Business

Accountant will not be penalised for role in auditing European banking arm of Lehman Brothers, after 18-month investigation

Accountant Ernst & Young will not be penalised for its role in auditing the European banking arm of Lehman Brothers, after Britain’s accountancy regulator ended its 18-month investigation on Friday.

The Accountancy and Actuarial Discipline Board (AADB) has concluded that no action should be taken against E&Y or any individuals in connection with the auditing of the Wall Street firm before it collapsed in September 2008.

The disciplinary body, which is part of the Financial Reporting Council, started its investigation in June 2010 after allegations were made in the US bankruptcy court about accounting practices that had allowed Lehman to make its London business look smaller than it was really was.

The AADB looked at the use of what the US investigator Anton Valukas described in a 2,200-page report as a “gimmick”, known as Repo 105 and Repo 108, which made it look as if the bank was not borrowing money.

The AADB said the Valukas report “made criticisms of Lehman’s auditor, Ernst & Young, for failing to question and challenge improper or inadequate disclosures in Lehman’s financial statements” but did not specify whether the criticisms related to E&Y in New York or more generally.

The AADB, led by executive counsel Gareth Rees QC, examined the use of Repo 105 and 108 in the accounts of Lehman’s European arm after looking through E&Y UK’s audit files, hard copies of documents, information from laptops and emails and communications with other regulators. The audit team from E&Y had also been interviewed as had former Lehman staff members.

“Executive counsel considers that there is no realistic prospect that a tribunal would make an adverse finding against E&Y in the UK or members within that firm. The investigation will therefore be closed and no further action taken,” the AADB said.

Repo 105 allowed Lehman to sell packages of mortgages and bonds on a temporary basis and buy them back a few weeks afterwards. The deals were worth $50bn (£32bn). The AADB said that Valukas had found that “while the use of the Repo 105/108 transactions might not have been inherently improper, its sole function as employed by Lehman was balance sheet manipulation”.

E&Y welcomed the decision to close the investigation which it said was “confirming our belief in the quality of our audit work”.

E&Y is still being investigated in a different case over the way that Lehman Brothers kept its clients’ money separate from its own. The AADB, which can reprimand and fine companies, began looking at this separation of client assets in October 2010 after the Financial Services Authority, the City regulator, raised concerns.

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