The Lehman Bankruptcy Examiner’s Report is an aggravating example of, “Be careful what you wish for.” The mainstream media (MSM) is now paying attention to the Big 4 – Deloitte, KPMG, PricewaterhouseCoopers, and Ernst & Young.

The financial crisis is now about accounting fraud.

Every two-bit journalist and blogger on the business beat is spitting out stories to keep up and one-up each other. It’s not every day that the accounting firms provide so much gossip about spectacular criminal and civil penalties. Well, actually, it is every day. There’s almost a thousand stories at re: The Auditors pointing to just such an outcome if any of the Big 4 ever looked down the barrel of a litigation shotgun like Lehman.

Ryan Chittum is a Staff Writer for The Audit, part of the Columbia Journalism Review where he critiques media coverage of business. Yes. It really is called The Audit.

On March 15th Ryan claimed blogs are beating MSM on the Lehman story but lamented the short attention spans of most publications.

Look, I know that Lehman collapsed a year and a half ago, but this is a major story—one that finally gets awfully close to putting the crimes in the crisis. I’ll go ahead and say it: If you’ve wanted to know about the Valukas report and its implications, you’ve been better served by reading Zero Hedge and Naked Capitalism than you have The Wall Street Journal or New York Times…

Welcome to my world, Ryan.

On March 16th, Ryan over-the-knee spanked John Carney, Managing Editor of Clusterstock, for tripping all over himself arguing against prosecutions for Lehman scandal actors.

I suppose we shouldn’t be surprised that John Carney thinks “We Should Not Criminally Prosecute Lehman Executives.” After all, this is someone who is a fan of insider trading, which he says “harms no one” and ought to be legalized….

I agree with Ryan. John Carney has it all wrong. Does being on TV a lot create the delusion that wishing can make it so? John Carney practiced law. He knows better.

Anton Valukas, the Lehman Bankruptcy Examiner and Chairman of law firm Jenner & Block, knows his way around white-collar and corporate defense. If Valukas points to “colorable claims,” I’m apt to believe there’s some colorful legal culpability to see. Jenner & Block had so many lawyers working long hours on the report, Valukas probably had Gene & Georgetti’s on speed dial.

But the Examiner’s Report is still developing. Valukas points to many areas where he had neither the time nor the stomach to explore further. He not so subtly tells other interested parties to go wild.

Is Ernst & Young going to fail like Arthur Andersen?

These are easy tropes to toss – Andersen, Enron and off-balance sheet shenanigans. But the Repo 105 discussion is a distraction. So is the “Sarbanes-Oxley failed us” whine. Repo 105 is not off-balance sheet accounting but good old-fashioned “round-trip” transaction shenanigans. This was garden variety accounting manipulation by the highest levels of the corporation, accomplished with the acquiescence of the impotent auditors. I described these techniques three weeks ago, “…Can Anyone Catch Lehman Stealing?” But finance bloggers often shine these turds to make them worthy of their dazzling quanty brains.

The biggest criminal exposure for the Lehman executives comes from their alleged lies about the use of the Repo 105 transaction as a “sale” or revenue recognition transaction versus a financing technique. This was not disclosed. They skipped it in the filings and confirmed these lies when signing false quarterly Section 302 certifications. These are criminal violations of law. We may also learn these sleights of hand with scienter were designed to provide cover for insider trading or options backdating activities. Those actions would also be criminal. And then there’s the possibility Fuld and others lied to Congress or other investigators. That could handcuff their attempt to avoid criminal prosecution.

Lehman executives are already defending against significant civil suits. I think more suits will be filed naming directors, especially audit committee members, in spite of the pass they got from Valukas. There are already tons naming executives, directors, Ernst and Young and others as defendants.

Ernst & Young is now vulnerable to more suits, better-drafted suits, bigger than $1 billion dollar suits. Civil suits won’t kill EY right away. EY may die, however, from suffocation if their legal contingency numbers rise rapidly enough. Or they may suffer a slow death from a thousand cuts when the cost to defend the firm becomes overwhelming. But the public won’t know because the Big 4 audit firms do not issue audited financial statements and do not disclose their legal contingencies or their reserves for those contingencies. We’ll have to depend on the regulators to keep an eye and make a plan if the cookie starts to crumble.

Arthur Andersen died because a criminal indictment prohibited them from signing audit opinions. That’s the business they were in and they were forced to turn in the keys. But Andersen was already on life support because of the number of lawsuits they were facing prior to Enron, the overwhelming costs of defending themselves and the inevitable settlements. The end was already near.

EY is not likely to be criminally indicted as a firm. There may well be something they should be indicted for but the U.S. Department of Justice has no appetite for throwing kerosene on this smoldering pile of dung. Another possibility is that EY may be subject to criminal indictments outside of the U.S. The loss of the EY U.K. member firm would be as crippling to the network as loss of the U.S. firm. The U.K. regulatory authorities are questioning EY due to the cross-border Repo 105 transactions and their use of U.K. law firm Linklaters as a “fixer.”

I would bet real money EY will have to testify before the House Oversight and Financial Reform Committee soon. Legislators may finally get heads out of the ratings agencies’ ass and realize that the accounting firms are supposed to serve the public interest. The Big 4 abandoned this public duty a long time ago, Sarbanes-Oxley or no Sarbanes-Oxley. Add lying to Congress to their list of sins if they screw this up.

Finally, the EY audit partners will be delivered to gallows by their firm. Regulators and the Department of Justice have signaled they will nail individuals for civil sanctions and penalties as well as criminal violations. It happened at KPMG. They tossed partners overboard to avoid a prosecution from their tax shelter scandal. EY recently disowned partners who went to jail for similar crimes. But we may see EY sheltering Lehman audit partners Schlich and Hansen until the firm cuts their own deal.