Lehman Brothers

Lehman Brothers sign removal

Get Yer Pointin’ Fingers Ready, We’re Looking Back on the Financial Crisis Ten Years Later

I got a notification from Twitter the other day reminding me that it’s been 10 whole years since I joined. Wow, that long? I realized that I’d done it the week the economy started swirling down the drain in earnest back in 2008. Unlike my Twitter anniversary, we can argue all day over the actual […]

EY

EY Glad That Whole Lehman Brothers Thing Is Over

EY settled its litigation with the New York Attorney General today, paying $10 million to make Eric Schneiderman go away. The suit was originally brought by now-New York Governor Andrew Cuomo over four years ago. EY claims that this was the “last significant lawsuit” remaining and said, “After many years of costly litigation, we are pleased […]

NY State Is Serious About the Battle with EY Over Lehman Audit Fees

Not so fast, Ernst & Young. You may be able to rebrand and spout off a bunch of feel good hooey about integrity or whatever silly phrase you're using these days but you're gonna need a bigger rug under which to sweep Lehman, guys: A New York state appeals court on Thursday revived the New […]

EY Still Planning to Settle With Lehman Investors, Also Still in Denial

Back in October, it was reported that EY planned to settle with Lehman Bros investors, subject to court approval (EY's denial notwithstanding): Ernst & Young LLP has agreed to pay $99 million to settle investor class-action allegations that it turned a blind eye when its audit client Lehman Brothers Holdings Inc. misled investors before the […]

Ernst & Young, Living in Denial, Settles with Lehman Investors for $99 Million

This is rich. Michael Rapoport reports: Ernst & Young LLP has agreed to pay $99 million to settle investor class-action allegations that it turned a blind eye when its audit client Lehman Brothers Holdings Inc. misled investors before the investment bank's 2008 collapse. The investors and Ernst "have reached an agreement in principle" to settle the […]

Let’s Walk Down Memory Lane with Ernst & Young and Lehman Brothers

This week, lots of people are talking about the Lehman Brothers bankruptcy because five years is half of a decade and, well, it was the biggest bankruptcy in U.S. history so that counts for something. Yesterday, we linked to the DealBook story that explains why the SEC threw in the towel and for me, it's one […]

New York Won’t Be Getting Its Mitts on Ernst & Young’s Lehman Brothers Fees

Nice try, Schneiderman. The New York attorney general has no authority to claim $150 million in fees that Ernst & Young earned from Lehman Brothers Holdings in the years leading up to Lehman's collapse in 2008, a judge ruled on Wednesday. The state had sought the fees as part of a lawsuit against Ernst & Young […]

Anyone Holding Their Breath for the SEC to Give Lehman Brothers a Slap on the Wrist Will Be Passing Out Soon

Bloomberg reports that an internal memo states that the crack squad looking at the Commission is wrapping up their investigation and a stern talking to is the probably the worst it'll get for Dick Fuld et al.:  Under a heading reading “Activity in Last Four Weeks,” the undated document reads, “The staff has concluded its […]

Getting the Story of Lehman Brothers to Broadway Should Be Jim Turley’s Post-Retirement Passion Project

Ernst & Young Global CEO Jim Turley is being recognized for his work with the National Corporate Theatre Fund (NCTF) and he wrote a blog post over at Bloomberg BusinessWeek explaining how he became such a theatre buff: “I grew up in St. Louis. From the time I’m old enough to remember, I was lucky enough […]

Saturday Open Thread: The FASB Is All Show, No Substance

Welcome back to Saturday, folks. Once again, Saturday Open Thread is your opportunity to air any grievances, talk about your week, complain about failing the CPA exam, or berate Colin for the purple shirt he wore to the PCAOB open meeting on Wednesday. Let it all out, it'll help you head into Monday feeling slightly […]

Ernst & Young: Just Try and Come After Our Lehman Brothers Audit Fees

E&Y worked hard ignoring whistleblowers, goat poo assets, and cowering to unqualified CFOs to earn those fees from that Titantic of an engagement, so don't you think you can waltz into court and demand they give that money back.   Ernst & Young, which was sued by New York in 2010 for allegedly helping Lehman Brothers […]

New Jersey Hasn’t Forgiven Ernst & Young for the Whole Lehman Brothers Thing

I mean, you know how it is, when you lose $192 million. It’s a tough thing to forget. The Journal reports that the Garden State has renewed its lawsuit against E&Y saying “Those review reports were false, as E&Y knew or should have known that Lehman’s quarterly financial statements were not prepared in accordance with [GAAP].” When reached for comment, E&Y spokesman Charlie Perkins’s voice was barely audible on a nearly worn out tape recording, “Lehman’s demise was caused by the global financial crisis that impacted the entire financial sector, not by accounting or financial reporting issues.” Wouldn’t it be nice if Chuck had Nick DeSanto sing the statement? With a rock accompaniment? At least it would liven up this story again. [WSJ]

Ernst & Young Just Gave the New York Attorney General 22.9 Billion Reasons to Feel a Little More Motivated Today

Because business is good at E&Y. Not PwC good or Deloitte good but good enough.

Ernst & Young today announced combined global revenues of US$22.9 billion for the financial year ended 30 June 2011, compared with US$21.3 billion in 2010, a 7.6% increase. In local currency, revenues grew 5.3%. “We have had a very strong year in each of our four geographic areas. We continue to see very positive reactions to the way we have globalized our organization over the last few years, our investments in emerging markets and the great dedication and commitment of our people,” said Jim Turley, Global Chairman and CEO of Ernst & Young.

Also, Jimbo says that E&Y is “focused on building lifelong relationships with our people. This ensures we have outstanding talent to provide our clients the best service wherever they do business.” So if your heart belongs to show business, fine. But your ass belongs to Ernst & Young.

[via E&Y]

Ernst & Young Aware of This Sino-Forest Situation, Seems Content to Watch It Play Out

Jonathan Weil has a column today on the train wreck that is Sino-Forest, the Chinese-Canadian timber company. In case you need caught up, there have been some questions about the company’s ability to report accurate disclosures and accounting. This led the research firm Muddy Waters to issue a not-so-flattering analysis of the company. Things like “Ponzi scheme” and “investing for the 23rd Century” don’t exactly get people jumping up and down for your company. Ask John Paulson.

Of course Sino-Forest didn’t do this all by themselves. They had credit rating agencies and auditors telling them everything was hunky dory for years and that’s Weil’s point. He reports that Fitch pulled its rating on S-F back in July and S&P finally pulled their rating this week. That just leaves Moody’s but guess who else is still hanging in there? Ernst & Young, baby! They’re still standing behind their audit opinions and showing no sign of budging. And JW is really curious to know who’s going to jump out of this tree first.

One question lingers: Which of the company’s paid opinion merchants will be the last to step aside? Will it be a credit rater? Or will it be the company’s auditor, Ernst & Young LLP in Toronto, which has yet to rescind any of its reports on Sino-Forest’s finances?

So far Ernst looks like the favorite, with only one rating company left in the hunt. Think of it as a contest between giant tortoises to see which one is slower. This time-honored ritual — of market gatekeepers waiting to blow the whistle until long after a scam has been exposed — has become so familiar, we might as well revel in the spectacle.

So these “gatekeepers” Weil speaks of – obviously this includes the Big 4. And it’s true that we’re all used to them waving their arms, screaming “DANGER!” in front of the burning heap that everyone has been aware of for ages (I didn’t say Lehman Brothers. Did you say Lehman Brothers? Who said Lehman Brothers?).

ANYWAY, E&Y should know that they have choices:

Ernst does have options, aside from bracing for the inevitable years of litigation and investigations. It could resign, explain why it is doing so and face criticism for acting too late. It could withdraw its previous audit opinions. It could insist to Sino-Forest’s directors that it be permitted to answer questions from the public about the work it has performed, as a condition of remaining onboard. Or it could hang on in silence, as it’s doing now, and watch its reputation endure more damage.

Could be that this is just another part of E&Y’s strategy. Sit tight while things play out, wait until things get really serious (i.e. bankruptcy, severe economic turmoil, civil charges, etc. etc.) and then come out swinging.

Tree Falls on Sino-Forest, Auditor Can’t Hear It [Bloomberg]

Ernst & Young Is Really Wishing They Hadn’t Blown Off That Lehman Brothers Whistleblower

FT Alphaville found this notable quote from District Judge Lewis Kaplan’s opinion (whole thing after the jump):

The TAC alleges that Lee told E&Y in June 2008 “that Lehman moved $50 billion of inventory off its balance sheet at quarter-end through Repo 105 transactions and that these assets returned to the balance sheet about a week later.” Assuming that is so, E&Y arguably was on 308 notice by June 2008 that Lehman had used Repo 105s to portray its net leverage more favorably than its financial position warranted, a circumstance that could well have resulted in the published balance sheet for that quarter being inconsistent with GAAP’s overall requirement of fair presentation. Accordingly, the TAC adequately alleges that E&Y misrepresented in the 2Q08 that it was “not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles” notwithstanding Lee’s disclosure to it.


“Lee” you may remember is Matthew Lee Lee, the Senior VP for Global Balance Sheet and Legal Entity Accounting who also said this about E&Y’s reaction to his warning on Repo 105:

They certainly didn’t support it. On the Repo 105 issue, they knew about it; they did not appear to know that the number was so large.

Ouch.

lehmanruling

FASB Closes the ‘Lehman Loophole’

FASB issued Accounting Standards Update No. 2011-03 to improve the financial reporting of repurchase agreements, also called “repos,” or other transactions that govern the transfer and repurchase of financial assets. The new guidance gives companies some new parameters to consider in determining whether a transfer is in fact a sale of an asset, and therefore qualifies for sale treatment, or whether an entity has retained some control over the asset and therefore cannot claim to have sold it. [CW]

What Do We Make of All These Non-Accountant CFOs?

John Carney points out that Bank of America, JP Morgan and Wells Fargo have all appointed new CFOs recently that are not accountants. It harkens him back to a time when another bank made a similar change.

Of course Carney is talking Lehman Brothers and Erin Callan. Oh and Ian Lowitt too. Both served as Lehman’s CFO prior to the bankruptcy. Funny thing – Francine McKenna wrote a post about the problematic situation of having a CFO with no accounting experience three months before Lehman went bankrupt. But BofA, JPM and Wells aren’t Lehman are they? GAAP is really NBD, right? [CNBC]

Did Ernst & Young Convince Republicans to Skip Last Week’s Senate Subcommittee Hearing?

If you followed last week’s “Role of the Accounting Profession in Preventing Another Financial Crisis” hearing before the Senate Banking Subcommittee on Securities, Insurance, and Investment, you may have noticed that “Ernst & Young” was never uttered by anyone on the panel, although Lehman Brothers was mentioned a number of times throughout the hearing. Anton Valukas, the bankruptcy examiner for the Lehman, was there after all and “Ernst & Young” appears in his report probably thousands of times. So why wouldn’t Ernst & Young be mentioned? This is a hearing about the accounting profession preventing, after all and Mr Valukas has stated in his report and elsewhere that “colorable claims” could be filed against E&Y. Stands to reason that perhaps the firm would come up at some point.


Also, if you followed the hearing with us on our live-blog, you definitely heard Francine McKenna and I complaining about the sorry turnout by the members of the subcommittee. The majority of questions coming from the subcommittee chairman, Senator Jack Reed (D-RI), with a few from Senators Kay Hagan (D-NC) and Jeff Merkley (D-OR). The eight GOP members were nowhere to be found. Now maybe accounting isn’t the sexiest of topics but it’s hard to argue that this wasn’t an important hearing where many questions could have been asked of an industry that witnessed excrement coming into contact with an old Century. However, after a tip from a person familiar with situation, we may have an idea why there was such a pathetic turnout:

[T]he auditing firms did not like it they were holding the hearing and E&Y really was complaining to Reed that Valukas had been invited. As a result, the Republicans agreed that none of them would attend the hearing which in fact, none did.

Gotta love spiteful absence! Obviously we had to call around on this one and Ernst & Young spokesman Charlie Perkins declined to comment. As for the Republican members of the subcommittee, we have…well, nothing else to share at this point. But we’re hopeful! It’s entirely possible that all eight GOP members had something better to do than ask questions of industry experts that had a front row seat to the financial crisis, but then again the hearing was pretty early in the morning.

UPDATE: A spokeswoman for Senator Mike Crapo, the ranking member on the subcommittee, informed us that Mr Crapo was sick last Wednesday and canceled all his appointments for that day.

O Bank Restatements, Where Art Thou?

Because Jonathan Weil is wondering.

He noticed that Audit Analytics found that 699 SEC-registered companies filed restatements last year which was slightly higher than ’09. This was considerably less than the 1,566 restatements in ’06 but when it came to the number of banks that had restatements, he noticed something strange:

The figures for banks, in particular, look unnaturally low. Forty-four banks restated last year, one fewer than in 2009. Even more curious, there were 133 banks that issued corrections from 2008 through 2010. That was down from 169 banks during the previous three-year period, before the financial crisis took off in earnest, which makes no sense.

Here we had the greatest banking industry meltdown since the Great Depression. Hundreds of lenders failed. And yet the number of banks correcting accounting errors declined while the collapse was unfolding. There were no restatements by the likes of IndyMac, Washington Mutual or Lehman Brothers, for example. The obvious conclusion is the government has been giving lots of banks a free pass, as have their auditors.

Honesty for Banks Is Still Such a Lonely Word [Bloomberg]

What Did Ernst & Young Call Lehman’s ‘Goat Poo’ Assets?

Considering E&Y was, ya know, the auditors and all, they should have been aware that these assets were a grade or two (or three) below human excrement and probably had some name for them.

Lehman Brothers Holdings Inc (LEHMQ.PK) filed for bankruptcy on Sept. 15, 2008 and then quickly sold its prize investment banking assets to Barclays Bank (BARC.L). JPMorgan had been Lehman’s banker. The court papers, filed in U.S. Bankruptcy Court in Manhattan on Thursday, said that Barclays and Lehman called certain Lehman assets “toxic waste” and “goat poo” and knowingly excluded them from their sale agreement.

Jim Turley has been a willing participant in this whole thing so far but were far more interested in what you guys think.

JPMorgan says Lehman called assets “goat poo” [Reuters]

Jim Turley Doesn’t Seem to Be Tired of Answering Questions About Lehman Brothers

Jimbo does admit that “we are not pleased to be in the spotlight like this” but per ushe, he takes it in stride and says, “it is something that we will deal with.”


Turley Says Specifcs From Obama Need to Come `Quickly'
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Did We Also Mention Our Flexible Work Schedule Arrangements?

“We stand by the audit opinions issued by Ernst & Young relating to the financial statements of Lehman Brothers.”

~ Sarah Jurado, a spokeswoman for Ernst & Young in the UK, who sounds like she’s got the talking points down, quoted in Bloomberg.

Making Sense of the Ernst & Young Defense

Over at Bloomberg, Jonathan Weil (who has the tendency to let the dust settle before chiming in) takes Ernst & Young to task for their lack of willingness to take responsibility for the Lehman Brothers bankruptcy and digs up a bunch of old bodies in the process.

E&Y had established itself as a repeat offender long before Governor-Elect Cuomo filed his suit. In recent years we’ve seen four former E&Y partners sentenced to prison for selling illegal tax shelters, while other partners have been disciplined by the SEC for blessing fraudulent financial statements at a variety of companies, including Cendant Corp. and Bally Total Fitness Holding Corp.

In the Bally case, E&Y last year paid an $8.5 million fine, without admitting or denying the SEC’s professional-misconduct claims. The SEC also has imposed sanctions against E&Y three times since 2004 for violating its auditor-independence rules.

After that friendly reminder (which certainly makes some people wince), JW takes a look at the E&Y’s response to the suit, specifically the part where they more or less say that Cuomo is off his rocker, “There is no factual or legal basis for a claim to be brought against an auditor in this context where the accounting for the underlying transaction is in accordance with the Generally Accepted Accounting Principles (GAAP).”

Weil says E&Y is missing the point entirely:

That isn’t an accurate depiction of the claims Cuomo brought, though. Cuomo’s suit unambiguously took the position that Lehman violated GAAP. What’s more, it’s not credible for E&Y to say that Lehman didn’t. (An E&Y spokesman, Charles Perkins, said he “can’t comment beyond our statement.”)

In the footnotes to its audited financial statements, Lehman said it accounted for all its repurchase agreements as financings. This was false, because Lehman accounted for its Repo 105 transactions as sales, a point the Valukas report chronicled in exhaustive detail.

The question is, of course, if this all adds up to fraud on E&Y’s part. Cuomo says it does. Weil says that E&Y needs to come up with a better story. Colin Barr, on the other hand, writes that E&Y could easily turn the tables:

The Ernst & Young statement suggests the firm will argue that it can’t be prosecuted under the Martin Act because Lehman, not E&Y, was the outfit actually producing the financial reports, and because it was Lehman, not E&Y, that was peddling billions of dollars of securities just months before its implosion.

In this view, E&Y was just a gatekeeper hired to vouch for Lehman’s books, something it will claim it did well within the confines of the law. This strikes lawyers who are familiar with the law as an eminently reasonable approach, if not exactly a surefire recipe for success.

“If I were Ernst & Young, I would assert I was not a primary actor,” said Margaret Bancroft, a partner at Dechert LLP and author of a 2004 memo that explained the Martin Act soon after Spitzer began brandishing it against Wall Street. “You can say that with more than a straight face.”

“Just gatekeepers,” and not “fraudsters,” is obviously the preferred view but the catch is, E&Y would be admitting that they are really shitty gatekeepers.

Ernst & Young Wants a Showdown

This was worth the wait.

Directly from the firm’s website:

Ernst & Young’s Response to New York Attorney General’s Complaint

New York, 21 December 2010 – We intend to vigorously defend against the civil claims alleged by the New York Attorney General.

There is no factual or legal basis for a claim to be brought against an auditor in this context where the accounting for the underlying transaction is in accordance with the Generally Accepted Accounting Principles (GAAP). Lehman’s audited financial statements clearly portrayed Lehman as a highly leveraged entity operating in a risky and volatile industry.

Lehman’s bankruptcy occurred in the midst of a global financial crisis triggered by dramatic increases in mortgage defaults, associated losses in mortgage and real estate portfolios, and a severe tightening of liquidity. Lehman’s bankruptcy was preceded and followed by other bankruptcies, distressed mergers, restructurings, and government bailouts of all of the other major investment banks, as well as other major financial institutions. In short, Lehman’s bankruptcy was not caused by any accounting issues.

What we have here is a significant expansion of the Martin Act. Although the Martin Act is almost 90 years old, we believe this is the first time that an Attorney General is attempting to use this law to assert claims against an accounting firm, rather than the company that took the alleged actions.

We look forward to presenting the facts in a court of law.

In other words, Andy – get lost; drop dead; suck it. AM Law Daily reports that E&Y has big guns on the case:

Miles Ruthberg, a former global litigation chair at Latham & Watkins, confirmed, via an e-mail to The Am Law Daily, that he’s representing E&Y in the suit along with Latham securities litigation and professional liability cochair Jamie Wine and Kramer Levin Naftalis & Frankel white-collar defense and SEC regulatory cochair Barry Berke. Latham, which has previously represented E&Y, has been handling securities litigation against the accounting firm stemming from Lehman’s failure.

To mark this occasion, we present an appropriate video (BL-inspired):

Fraud Experts: Calls for Criminal Charges Against Ernst & Young Are ‘Absurd’

Since Andrew Cuomo decided to make our lives insanely busy this week, we’ve been talking to lots of different people about what will happen next in the Ernst & Young saga. We stumbled across a couple of experts, Dr. Mark Zimbelman an Accounting Professor who specializes in fraud, forensic accounting and auditors’ detection of fraud at BYU’s Marriott School of Business, along with his son, Aaron Zimbelman, a doctoral student at the University of Illinois at Urbana-Champaign whose research interests include auditing, financial statement fraud and corporate governance.

The father and son team have a blog, Fraudbytes, that discusses, well<arious forms including a post from yesterday about this week’s developments.


We corresponded with the Zimbelmans by email for this interview. They have combined their positions to provide us with the answers to our questions.

Going Concern: Does E&Y risk losing creditability with the market at large (á la Andersen) because of these civil fraud charges?

Zimbelmans: We don’t think this case will hurt E&Y’s credibility, based on what we know at this point. Lehman’s accounting for Repo 105 transactions was in accordance with GAAP and appears to have been a common practice for similar transactions in the industry. In other words, E&Y was probably following the letter of the law in signing the audit opinion. In Andersen’s case, the firm had shredded documents and faced criminal charges. Until we see a clearer act of wrongdoing (e.g. a clear departure from auditing standards), we don’t see E&Y individually facing a significant loss of credibility. More likely, the auditing and accounting profession as a whole will take a credibility hit as individuals question the standards and industry norms adhered to by E&Y in auditing Lehman.

GC: Reports say that E&Y is in talks to settle – how do you interpret their willingness to settle rather than litigate in this matter?

MZ/AZ: We think a willingness to settle speaks mostly to the great deal of uncertainty associated with the litigation process in auditing cases. Jury trials in cases like these can be very unpredictable and may not be strongly related to whether or not E&Y actually did anything wrong. Juries tend to have a poor understanding of auditing and accounting issues and also tend to side with victims and against deep pockets. In this case in particular, were the case to go to trial, E&Y has a good chance to become a scapegoat for the collapse of Lehman and perhaps even the economic crisis as a whole. Even if the probability of a verdict against E&Y were fairly low, the damages assigned by a runaway jury could be devastating. This gives E&Y a strong incentive to settle, regardless of whether or not they did anything wrong.

GC: Is there any advantage to litigating?

MZ/AZ: If the requested settlement amount would be devastating to E&Y, the firm is better off litigating. The firm may also be better off litigating if the requested settlement amount is high and E&Y feels they have a very solid case that has a good chance at overcoming the common jury biases we discussed in the previous question.

GC: How would you react to those who feel that are calling for criminal charges against the firm?

MZ/AZ: We don’t really see any criminal behavior here–E&Y allowed Lehman to account for Repo 105 in accordance with GAAP and in accordance with what was fairly standard in the industry. Until we see evidence of potentially criminal behavior, calls for criminal charges seem absurd.

GC: Prediction time: what happens next? Fine of $X and….?

MZ/AZ: We doubt there are any criminal issues here. E&Y will likely try to settle as quickly as possible to get this behind them. Cuomo is likely to want a huge settlement because of the magnitude of the bankruptcy and because of the potential for a runaway jury. Given that Lehman’s bankruptcy was $691 billion, this settlement could easily exceed E&Y’s Cendant settlements which were over $600 million.

Ernst & Young Wasn’t About to Let Some Civil Fraud Charges Put a Damper on Their Holiday Season

A trusted source emailed us that things were getting festive last night:

EY had their FSO party last night at Cipriani’s downtown. Used to be at Tavern on the Green.


This is good news. And not just because this is an upgrade from last year’s party. Despite all the bad press the firm is getting, the celebration will go on! It must go on! Now whether the Governor-elect was aware of this and purposefully decided to make a few people’s hangovers a little worse by filing the charges today, we can’t possibly know (but he does seem to have an innate sense of timing).

What we would like to find out is the mood at this fiesta. Were there a lot of long faces, grumbling about Hank Paulson, weeping in their single malts? OR did people manage to convince themselves that this whole thing is NBD and people had a good time – enjoying the open bar, power smoking Cohibas, making awkward sexual advances, partners dancing?

We need, and the people demand details, so if you were at the party email us the details.

Cuomo Checks Ernst & Young Off the Hit List

Or throws another scalp on the pile, whatever you prefer.

The Journal is obviously very cozy with the Governor-elect:

New York Attorney General Andrew Cuomo filed a lawsuit against Ernst & Young for civil fraud Tuesday, accusing one of the nation’s largest accounting firms of helping Lehman Brothers Holdings Inc. hide its financial weakness from investors for about seven years before the bank finally collapsed in September of 2008.

Ernst & Young knew about, supported and advised Lehman on its “Rs, a type of debt the bank took on, but labeled as sales, which made the firm appear to investors less risky than it really was, according to the complaint. The audit firm also stood by while Lehman misled analysts and investors on conference calls and in financial filings about its levels of risk, particularly after the firm’s stability began to crack after the credit crisis began in 2007, said the complaint.

“Ernst & Young substantially assisted Lehman Brothers Holdings Inc., now bankrupt, to engage in a massive accounting fraud,” Mr. Cuomo wrote in his complaint.

Now that the AG has pulled the trigger on this, we’re wondering what’s next. E&Y still isn’t talking, other than the statement they’ve been giving since the bankruptcy examiner’s report came out in March. One comment suggested a settlement in the nine figure range which would put them in proximity of the DOJ’s fine of KPMG back in 2005.

Colin Barr over a Fortune reports that Cuomo wants at least the audit fees back ($150 million, according to the complaint):

The complaint, filed in state Supreme Court, seeks the repayment of at least $150 million in fees the audit firm collected between 2001, when Lehman’s aggressive accounting began, and 2008, when the venerable bank collapsed, precipitating a global bank run.

“Our lawsuit seeks to recover the fees collected by Ernst & Young while it was supposed to be using accountable, honest measures to protect the public,” said Attorney General Andrew Cuomo.

Something tells us that Cuomo won’t be satisfied by simply the audit fees; we’re talking about the largest bankruptcy in history, after all. If you feel like ballparking the fine, we wouldn’t turn away any outlandish guesses.

UPDATE: Felix Salmon also points out E&Y’s lack of communicado:

E&Y knew this was coming—we all did—but despite that fact, its only public reaction so far has been to refuse to comment. That doesn’t look good, and it forces us back to what the company said in the wake of the Valukas report—that its work as Lehman auditor “met all applicable professional standards,” whatever that’s supposed to mean.

He also agrees with us that the fine will be greater than the $150 million and notes (not hiding his disappointment) that no partners were named, “E&Y will avoid admitting blame and also avoid criminal prosecution. […] [T]he only defendant is Ernst & Young LLP; there are no named individuals on the list. So E&Y’s partners are probably safe too. Sadly.”

Unless, of course, the SEC or PCAOB opt to take up that disciplinary slack. Don’t forget that some people think that Cuomo is making this move because he wants the “last scalp” before leaving the AG’s office for the Governor’s mansion. We realize pinning hopes on the SEC and PCAOB isn’t exactly comforting for those wishing to see more action but maybe Cuomo’s actions are the motivation they needed.

We’ll keep you updated throughout the day and if there’s any internal word from the hallowed walls of 5 Times Square, do email us the details.

But What if the Auditors Were Fools?

“Could Ernst & Young have done a better job? Maybe, but claiming they could have done a better job doesn’t necessarily make them liable. Even the best of auditors can be fooled.”

~ Anthony Sabino, professor of law and business at St. John’s University

Charlie Gasparino: Someone’s Holiday Vacation Is Holding Up the Ernst & Young Settlement Talks

The Fox Business Network ace reporter is saying that Cuomo & Co. would like to settle this thing up ASAP (a “quick scalp” before AC goes to Albany) however it is definitely not happening this week because, “According to people at Ernst & Young […] one of the lead investigators in Cuomo’s office is on vacation.”


Also interesting is that Chaz reports that E&Y thought there wasn’t going to be such a rush to get this thing settled but now everyone is all worked up because the story got leaked.

As for the SEC stuff, we don’t know what to make of it since there’s been hardly any news about talks between E&Y and the Commission. Francine McKenna told us that Gaspo “got a lot of smoke blown up his tush,” which is typical for reporters who cover Big 4 firms once in a lunar eclipse on the winter solstice.

(UPDATE) Early More Chatter on the Ernst & Young Civil Charges

As we mentioned earlier, the Wall St. Journal has reported that out-going New York Attorney General Andrew Cuomo will be filing civil fraud charges against Ernst & Young related to its actions (mostly lack thereof) that led to the Lehman Brothers bankruptcy. Charges are expected this week but everyone is talking about it now obviously (and we were hoping for a quiet week).

Anyhoo, we’ve rounded up some of the early sound blog bites out there and we’ll keep you updated throughout the day. Of course, if you’re with E&Y and have any insight or hear some calming, soothing words from TPTB, email us t��������������������ore–>
In her column at Forbes, Francine McKenna is happy that Andrew Cuomo is actually doing something, which is more than can be said for the Feds:

Whether Cuomo is doing this on his own, in defiance of the Feds, or has their implicit blessing in light of the Federal Government’s seeming unwillingness to act, New York’s Attorney General is showing the world he’s the only one in the US with the nerve to shake this tree.

Fox News’s Greta Van Susteren is not so impressed, saying criminal charges are really what’s needed:

Attorney General Andrew Cuomo needs to get tough instead of this “window dressing” CIVIL business. He is soon to be the Governor of NYC and this is his last act as the State’s Attorney General. I hope this is not to appease Wall Street. Let a jury decide whether is is criminal behavior or not and whether anyone has committed a crime. As it stands now, Cuomo is blocking that determination with only civil charges.

Felix Salmon postulates that Cuomo is using the possibility of criminal charges to scare E&Y into a settlement:

On the other hand, a civil fraud suit is not a criminal prosecution. Even if E&Y fights the charges and loses, it probably won’t find itself on the receiving end of the kind of criminal charges which brought down Andersen. Still, I’m sure that Cuomo’s office is doing nothing to downplay the contingent existential threat here, in its negotiations with E&Y.

Yves Smith at Naked Capitalism is practically giddy and hopes that this will turn up the heat on Dick Fuld:

One can only hope turning up the heat on Ernst & Young will lead to the prosecution of Richard Fuld. The buck is supposed to stop with the CEO, particularly when they are paid as many bucks as Fuld received. Given the scale of looting that took place in the runup to and after the crisis, there is no hope of getting the banking industry back in its proper role of supporting the real economy until we see some senior bank executives in orange jumpsuits.

CNBC’s John Carney thinks that execs at both Lehman and E&Y should take the civil charges as good sign:

Why should executives at Lehman and Ernst & Young be relieved? Because the filing of civil charges rather than criminal charges may signal that prosecutors do not believe they can prove a criminal case. The key difference between criminal and civil charges in these contexts is the quality of evidence and it looks as if New York Attorney General Andrew Cuomo’s office has decided it doesn’t have the evidence to prove a criminal case beyond a reasonable doubt.

Fortune’s Colin Barr is appalled that E&Y’s Global CEO Jim Turley believes that there wasn’t any chicanery going on:

Take this exchange between E&Y chief Jim Turley and Fortune’s Geoff Colvin, from a September interview.

Colvin: Would it be fair to say that the crisis was caused in part by some financial firms doing misleading things that were within the rules?

Turley: I don’t know that it would be fair to say they were doing misleading things.

It’s remarkable Turley would still say that two months after the financial firm of the best and the brightest, Goldman Sachs (GS), agreed to pay $550 million to settle Securities and Exchange Commission charges that it misled investors in a bubble-era debt deal. The auditors weren’t involved in that one, but the Wall Street mindset was pretty obvious to everyone not running an audit firm.

Over at DealBook, Peter Henning has an interesting theory that the NYAG could be going after the accountants while the SEC focuses on individuals:

If the S.E.C. agreed to share the Lehman case with the New York attorney general, then it may be that the state took the accountants as the focus of its investigation while the federal government concentrates on individuals. Such a division of labor would allow each to husband resources by avoiding any duplication of effort in the investigation – and may be the reason the state is planning to file charges before the S.E.C. decides to act.

Emily Chasan at Reuters managed to get a statement out of someone (Charlie Perkins’s phone has likely exploded by now) although the firm is sticking to the talking points:

A spokeswoman for Ernst & Young said the company did not comment on speculation and repeated a previous statement made by the firm about its dealings with Lehman Brothers. “Throughout our period as the auditor of Lehman, we firmly believe our work met all applicable professional standards, applying the rules that existed at the time,” the statement said.

Matt Taibbi (whole post is worth a read) is calling for the paramedics:

My guess is that this suit is the beginning of the end for Ernst and Young and, who knows, may be the beginning of a series of investigations that ultimately take down the auditors and ratings agencies that made the financial crisis possible. Without accountants and raters signing off on all the bogus derivative math and bad bookkeeping, a lot of this mess would never have happened.

We’ll be updating this post with more reactions and as things develop.

Ernst & Young Rang the Closing Bell Today

We don’t recognize anyone but you’re invited to point any notables out.

.

And you just know that somewhere, Dick Fuld is slobbing around in a old CU sweatshirt, muttering about backroom number-crunching dweebs that are still in business.

[via NYSE]

Without Blaming Lehman Directly, FASB Solicits Comments on a Repo Accounting Do-Over

Filed under: more mess to directly blame on the fall of Lehman Brothers and Uncle Ernie’s epic failure

FASB is being awfully kind to those who played a large part in that whole total financial meltdown issue by avoiding actual name-dropping in their latest exposure draft but we don’t need names to know who they are talking about. *coughLehmancough* Here’s the note from FASB yesterday:

The Financial Accounting Standards Board (FASB) issued an Exposure Draft (ED) today to solicit input from stakeholders on its proposal to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The FASB requests comments on this ED by January 15, 2011.

“During the global economic crisis, concerns were expressed about a narrow aspect of existing guidance for determining whether a repo should be accounted for as a sale or as a secured borrowing,” notes FASB Acting Chairman Leslie F. Seidman. “The proposals contained in this Exposure Draft seek to address these concerns by simplifying this guidance.”

You hear that? You’ve got until January 15th to draw up your fantastic comment letters (please don’t disappoint us, we haven’t seen a good comment letter since North Carolina State Employees’ Credit Union President James Blaine said of mark-to-market: “Theoretically arrogant; in practice insane; financially negligent and reckless. Other than that, I have no concerns.”) on this new repo accounting proposal.

Once again, FASB wants the input of the worker grunts to find out A) what the plan is and B) how they should go about implementing it.

Seeing as how comment letters are a hallmark of our fantastically cooperative profession maybe FASB is going about this the wrong way. After all, it would be the investors who relied on incorrect information on Lehman’s financial condition based on creative repo accounting (mind you, “creative” and “fraudulent” are not the same thing) who are most impacted by current rules and any changes, not the accountants putting together the financial statements. Surely they would know better than to rely on their own financial information.

If you are unfamiliar with the joys of repo accounting FASB has offered a quick primer:

In a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. Topic 860, Transfers and Servicing, prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repo agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets.

The amendments in this proposed Update are intended to simplify the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets, as well as implementation guidance related to that criterion.

Clarification is always nice, I guess, but paint me skeptical, I don’t see additional guidance doing much for closing the giant gaping loophole that Lehman drove a truck through on its way right off the cliff.

Handicapping Ernst & Young

Ernst & Young, take my word for it, will never be indicted by the U.S. government, as a firm, for its role in any Lehman fraud that’s eventually proven. It’s also highly unlikely – 1000 to 1 odds I’d say – EY will be fined by the SEC or the PCAOB, as a firm, in a civil or disciplinary case.

~ Francine McKenna says it’s a longshot.

Accounting News Roundup: PwC Rakes in Fees on Lehman; Grant Thornton: Opening the Audit Market Wouldn’t Hurt Big 4; One in Three IRS Employees Are Eligible for Retirement | 10.15.10

Bernanke Signals Intent to Further Spur Economy [NYT]
“The Federal Reserve chairman, Ben S. Bernanke, indicated on Friday that the central bank was poised to take additional steps to try to fight persistently low inflation and high unemployment.

‘Given the committee’s objectives, there would appear — all else being equal — to be a case for further action,’ he said in a detailed speech at a gathering of top economists [in Boston].

Mr. Bernanke noted that ‘unconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.” But he suggested that the Fed was prepared to manage the riske most powerful tool remaining in the Fed’s arsenal of weapons to stimulate the economy: vast new purchases of government debt to lower long-term interest rates.’ ”

Lehman Brothers’s U.K. Administrators Billed $420 Million Since Collapse [Bloomberg]
“Lehman Brothers Holdings Inc.’s European administrators have billed 262 million pounds ($420 million) for work since the bank sought bankruptcy protection in September 2008.

The administrators have recovered 11.9 billion pounds in cash in the 24 months since the bank’s collapse and more than 350 trading counterparties have settled what they owed according to a report today on the PricewaterhouseCoopers LLP website.

‘We have achieved exceptional progress in the administration, dealing with some 29 billion pounds of securities and cash, having now returned almost 12 billion pounds of this to clients,’ Tony Lomas, the PwC partner on the Lehman administration, said in a statement. ‘Whilst there are still numerous major challenges to address, our actions to date have generated significant realizations for creditors which will be paid to them in due course.’ ”

Y U Luv Texts, H8 Calls [WSJ]
“For anyone who doubts that the texting revolution is upon us, consider this: The average 13- to 17-year-old sends and receives 3,339 texts a month—more than 100 per day, according to the Nielsen Co., the media research firm. Adults are catching up. People from ages 45 to 54 sent and received 323 texts a month in the second quarter of 2010, up 75% from a year ago, Nielsen says.”

Big Four can take losing a chunk of the audit market [Accountancy Age]
“Opening up a fifth of the FTSE-250 audit market would only hit the revenues of the Big Four by an average of £6m, according to Grant Thornton.

Welcoming the EC’s green paper on audit reform, which has made a raft of radical measures including mandatory rotation of audits, the firm said opening up the audit market would not hurt the Big Four.”

Mozilo and SEC in Deal Discussions [WSJ]
“Confidential talks begun in recent weeks appear to be moving toward a settlement in the Securities and Exchange Commission’s high-profile civil fraud case against former Countrywide Financial Corp. Chief Executive Angelo Mozilo and two other former executives, people familiar with the matter said.

Late Thursday, a status conference on the case was ordered for Friday, a move that could signal a new development in the suit. If no agreement is reached, a jury trial is scheduled to begin Tuesday in federal court here before Judge John Walter.

It is also possible, people familiar with the matter said, that only one or two of the defendants would reach a settlement before the trial. Attorneys for both sides are preparing for trial in the event it goes forward, said people familiar with the matter.”


33% of IRS’s 106,000 Employees Are Eligible for Retirement [TaxProf Blog]
Do they simply love their jobs that much?

A little perspective on those 18,000 XBRL errors [CPA Success]
“It’s not that bad.”

Will Ernst & Young Be the Next Firm to Get a Makeover?

[caption id="attachment_18945" align="alignright" width="150" caption="No more square?"][/caption]

It sounds like it!

Judging by the article over at Marketing Week ideas are being kicked around and since Audits the Emmys!” Perhaps, “Zitor works for us!” Or simply, “Our opinion indicated that Lehman’s financial statements for that year were fairly presented in accordance with GAAP!”

Even a more important questions – should they incorporate a mascot? Maybe an E&Y Phanatic? A live animal may do the trick. Or this.

Let’s hear some ideas.

Ernst & Young looks to stand out among “big four” [Marketing Week]

Here’s Some Stuff You Didn’t Buy at PwC’s Lehman Brothers Auction in London

Gosh, team. It’s been over two years since Lehman bit the big one and now all that’s left is bits and pieces (Barclays, pink sheets, Dick Fuld’s stonewalling testimony) and charges from the SEC that could eventually see the light of day (unless the sun burns out first). Oh! And Ernst & Young. They’re in the mix too, although some people we talk to have their doubts about any repercussions.

Anyhoo, there was a big auction at Christie’s in London today directed by the newly-branded PwC. After everyone got done ribbing the P. Dubs partner in attendance about the Atari design, the bidding started. Here’s a little taste of what’s been sold so far, courtesy of the Times:

• Corporate Sign from Canary Wharf building – £42,050. Bidding started at £5,000

Gary Hume’s Madonna – £120,000 (most expensive item so far)


• A collection of five maps from circa 1720 – £1,875

• An 1870 collection of the works of one Bill Shakespeare

• Two etchings by Lucian Freud

• Photographs by Sebastião Salgado

• A 43.5-inch painted pine model of a 62-gun ship

Overall, the auction has topped £600,000, according to Accountancy Age but is still rising. You can probably still get a bid in if you hurry.

Lehman Memories Sold Off Piece by Piece at Auction [NYT]

Jim Turley Doesn’t Think That The Financial Crisis Was Caused By Anyone Doing Anything Misleading

It turns out – without naming names (read: Dick Fuld) – the companies at the nucleus of the shit hitting the fan were just making bad business decisions. That’s all.

He also takes exception with the notion that E&Y committed malpractice.


And would like to explain exactly what the Bankruptcy Examiner does and points out that he didn’t have any problem with the accounting.

C-Suite Strategies [Fortune]

Accounting News Roundup: Lehman Investigation Narrows, SEC to Bring Charges Someday; Dubai World’s Debt Deal; Trump Makes Offer to Park51 Investor | 09.10.10

SEC Homes In on Lehman, ‘Funds of Funds’ [WSJ]
“The Securities and Exchange Commission’s investigation into the collapse of Lehman Brothers Holdings Inc. is zeroing in on an accounting maneuver used to give the appearance that the companyt levels, according to people familiar with the situation.

Agency officials also are probing whether former Lehman executives failed to adequately mark down the value of the huge real-estate portfolio acquired in the securities firm’s takeover of apartment developer Archstone-Smith Trust or to disclose the resulting losses to investors, these people said.

The narrowing probe could move the SEC closer to bringing civil charges related to Lehman’s collapse in September 2008, though a decision doesn’t appear imminent.”

Study Says Directors Favor Themselves, Not Shareholders [FINS]
“A new study found that directors who field whistleblowing claims are likely to discount charges that could threaten their board seats and will assign fewer resources into investigating such claims.

In weighing hypothetical charges, 83 veteran directors at large U.S. corporations said they would allocate 42% fewer resources on average to fraud tips that might ultimately cost them their board seats.”

Dubai World reaches $24.9 billion debt deal [Reuters]
“State-owned conglomerate Dubai World DBWLD.UL on Friday reached a formal deal to restructure around $24.9 billion of liabilities, partly easing recently heightened concerns over the Gulf emirate’s debt woes.

While Dubai World’s agreement with most of its creditors is seen as a positive step for Dubai, the announcement comes just days after a unit of Dubai Holding, the conglomerate owned by Dubai’s ruler, said it will delay repayment on a $555 million loan, the second time it has failed to meet a repayment deadline.”

Huguette Clark’s multi-million-dollar fortune remains in hands of her financial managers [NYDN]
“Millionaire recluse Huguette Clark’s $500 million fortune will remain in the hands of financial managers who are under investigation, a Manhattan judge decided Thursday.

Judge Laura Visitacion-Lewis tossed a request by Clark’s relatives to appoint an independent guardian to oversee her finances and property, including Fifth Avenue’s biggest co-op apartment.

The judge called the family’s concerns about Clark’s health and state of mind “speculative” and “insufficient” to merit wresting control from her lawyer, Wallace Bock, and accountant, Irving Kamsler.”

Control Freak Q&A With Caleb Newquist [Control Freak]
Approva’s Control Freak blog asked me what I liked about being “control freaky.” Check out this post for the answer and more bits of wisdom from Adrienne’s favorite blogger.


Trump Offers to Buy Out Islamic Center Investor [WSJ]
“Mr. El-Gamal, founder of SoHo Properties, is one of eight investors who paid $4.8 million for a building two blocks from the site of the Sept. 11 terrorist attacks.

The statement came following reports that real estate mogul Donald Trump was offering to buy one investor’s stake in the property.

In a letter to Hisham Elzanaty, an Egyptian-born Long Island businessman and a major investor in the project, Mr. Trump offered to buy his stake for 25% more than Mr. Elzanaty paid for it.”

Former GE Unit Executive Says He Was Pushed Out for Questioning Accounting [Bloomberg]
“General Electric Capital Services was sued by a former executive who claims he was forced out for questioning the company’s treatment of an asset.

Edward Gormbley, who worked for GE Capital from 2000 until he quit in September 2009, filed his suit today in state court in Stamford, Connecticut. The complaint also names parent General Electric Co. and its chief executive officer, Jeffrey Immelt.

Gormbley said he was punished for challenging the valuation of silicon-maker Momentive Performance Materials, an investment asset. GE Capital overstated Momentive’s value in December 2008 to improve its own balance sheet, he said. Valuing the asset correctly would have reduced ‘GE Capital’s earnings 100 percent,’ in the fourth quarter that year, according to the complaint.”

Good Thing They Had Auditors

“Lehman’s books were in such a mess that I don’t think they knew where they were.”

~ Elizabeth James, a director of Barclays’s futures business, testifying in bankruptcy court.

Charlie Gasparino: “As of right now” Erin Callan Won’t Be Charged By the SEC

But next Monday, Wednesday or post-Labor Day, it could be a completely different story!


We’re waiting on the video from our friends over at FBN but for now here’s what the Fox Business News Breaking specialist has for us:

On who from Lehman Brothers will be charged by the SEC:
“There is a lot of speculation as to who will be charged in the SEC’s investigation of Lehman Brothers. As of right now at least, it will not be the former CFO Erin Callan.”

On how we know Callan is not being charged:
“Attorney for Callan Robert Cleary tells FBN she has not received a Wells Notice. As of right now she is not going to get charged. It could still come.”

On when the charges will be filed:
“This is an interesting development because the end game on this is clearly happening. And it’s the two year anniversary of Lehman’s bankruptcy Callan was one of the people putting out the positive image of the firm as it was imploding that’s what they are investigating.”

So there you have it! Things are day-to-day for Ms Callan (i.e. kicking it in the Hamptons, dating a fire fighter). The situation remains fluid.

Charlie Gasparino Suggests That Erin Callan Should Be Shaking in Her Designer Boots

“At least part of it is focused on the March 2008 capital raise where they went out and did a preferred deal. Erin Callan made some very positive bullish statements about Lehman. About how the nature of its finances would mean that it did not need more capital and three months later Lehman Brothers needed more capital and then came the decline of the firm.”

~ The Fox Business Correspondent/Ace Reporter insists that an announcement is “imminent.” That’s what the rumor mill says anyway.

FASB to Make Heads or Tails of Repurchase Accounting Soon Enough

Back in April when he was testifying before the House Financial Services Committee, FASB Chairman Bob Herz couldn’t really say one way or another what he thought about the repurchase accounting that Lehman Brothers was using.

At the time, Herz just said that FASB would work diligently with the SEC (no porn allowed), that Lehman skirted the disclosure rules and that they were going to get to the bottom of this, come hell or Barney Frank’s shrewd disposition.


In a recent meeting with his fellow double-entry wizards in Norwalk, Herz said that he was opening up ‘a very targeted scope project’ that will get to the bottom of this pile:

“Once we’re made aware that people are trying to structure around specific provisions in the accounting literature, it makes you think about whether those provisions need to be looked at,” he told the board. “We’ve asked the staff to take a look at that and come back with some recommendations in the pretty near term,” he said.

FASB Plans New Rules Around Repurchase Agreements [Compliance Week]

Is Mary Schapiro Talking About a Certain Lehman Brothers Auditor?

Maybe! After last week’s settlement with Team Jehovah and the financial reform bill allowing for a few more hands on deck, the SEC chair says there are some other smackdowns in the works.

Unfortunately she doesn’t name names but use your imagination:

“We have investigations in the pipeline, across products, across institutions, coming out of the financial crisis,” SEC Chairman Mary Schapiro said after testifying before a House of Representatives subcommittee hearing.

Asked if the bulk of the cases have already been brought to light, she said: “Not necessarily, not necessarily.”

So it’s a grab bag really. Although, as you may recall, Dick Fuld is on the record that E&Y was on board with whatever the dorks in accounting were doing. Or maybe MS is just messing with Congress. The situation remains fluid.

SEC chairman says more post-crisis cases in pipeline [Reuters]

PCAOB Report States That There Was a Fair Amount of Failing Going on at Ernst & Young

The PCAOB has issued its annual report on Ernst & Young having given the firm the third degree at its national office and 30 of its 80 U.S. offices. It inspected 58 audits performed by the firm but exactly who is, of course, a big secret (unless you tell us).

There were five “Issuers” that were listed in the report and some form of the word “fail” was used 25 times (that includes the footnotes).

[Issuer A] The Firm failed to adequately test the issuer’s loan loss reserves related to certain loans held for investment. Specifically, the Firm failed to reconcile certain values used in the issuer’s models with industry data, failed to test the recovery rates used in the issuerfailed to test the qualitative components of the reserves.

Damn those loan loss reserves!

[Issuer C] The Firm failed to perform sufficient procedures to test the issuer’s allowance for loan losses (“ALL”). The issuer determined the general portion of its ALL estimate, which represented a significant portion of the ALL, using certain factors such as loan grades. Data for this calculation were obtained from information technology systems that reside at a third-party service organization. The Firm relied on these systems, but it failed to test the information-technology general controls (“ITGCs”) over certain of these systems, and it failed to test certain of the application controls over these systems. Further, the Firm’s testing of the controls over the assignment and monitoring of loan grades was insufficient, as the Firm failed to assess the competence of the individuals performing the control on which it relied.

This loan thing appears to be a trend…

[Issuer D] The Firm failed to sufficiently test the costing of work-in-process and finished goods inventory. Specifically, the Firm’s tests of controls over the costing of such inventory were limited to verifying that management reviewed and approved the cost allocation factors, without evaluating the review process that provided the basis for management’s approval.

Hopefully that doesn’t blow back on an A1.

Anyway, you get the picture. The whole report is below for your reading pleasure. E&Y’s got its $0.02 in, however it was short and was mostly concerned about the firm’s right to keep its response to Part II (the non-public part)…non-public:

We are enclosing our response letter to the Public Company Accounting Oversight Board regarding Part I of the draft Report on 2009 Inspection of Ernst & Young LLP (the “Report”). We also are enclosing our initial response to Part II of the draft Report.

We note that Section 104(g)(2) of the Sarbanes-Oxley Act requires that “no portions of the inspection report that deal with criticisms of or potential defects in the quality control systems of the firm under inspection shall be made public if those criticisms or defects are addressed by the firm, to the satisfaction of the Board, not later than 12 months after the date of the inspection report.” Based on this statutory provision, we understand that our comments on Part ii will be kept non-public as long as Part ii of the Report itself is non-public.

In addition, we are requesting confidential treatment of this transmittal letter.

So this doesn’t mean much other than E&Y would prefer that no one know how it managed to tell the PCAOB to fuck right off as nicely as it could.

If you had the pleasure of being on one of these 58 engagements, we’d love to hear about your experience.

2010 Ernst Young LLP US

Accounting News Roundup: Bank Tax Scrapped; Deloitte Cleveland Names New Managing Partner; What’s the Future of Internal Audit? | 06.30.10

Financial-Rules Redo Passes Major Hurdle [WSJ]
Who knew that lobbyists could be so effective? “Democrats initially proposed the $18 billion tax on the nation’s largest banks and hedge funds to cover the cost of expanding gof financial services, among other things. But the small number of Republicans crucial to the bill’s passage balked at the fee, which was added at the last minute to the legislation.

With more than a year’s worth of work in the balance, Democrats ditched the levy on Tuesday. Instead, they agreed to offset the bill’s costs by winding down early the $700 billion Troubled Asset Relief Program and assessing a more modest fee on banks through the Federal Deposit Insurance Corp.”

Volcker Said to Be Disappointed With Final Version of His Rule [Bloomberg]
If you go to the trouble of getting your name on the rule, with specific ideas in mind about what said rule entails, you’d be pretty upset if lobbyists hacked up to the point that it’s hardly recognizable. Plus octogenarians are probably used to getting their way.

“Volcker, the 82-year-old former Federal Reserve chairman, didn’t expect the proposal to be diluted so much, said a person with knowledge of his views. He’s content with language that bans banks from trading with their own capital, the person said.

‘The Volcker rule started out as a hard-and-fast rule on risky trades and investments,’ said Anthony Sanders, a finance professor at George Mason University School of Management in Fairfax, Virginia. ‘But through negotiations, it was weakened and ended up with many loopholes.’ ”


How Not To Look Desperate When Looking for Your Next Finance Job [FINS]
Because we know there are plenty of you out there.

Deloitte names Craig Donnan managing partner in Cleveland [Crain’s Cleveland]
Cake party? Mr Donnan takes over for Pat Mullin who has been the managing partner of the office since 1999.

The future of the internal audit profession [Marks on Governance]
“If we are to be relevant, chief audit executives (CAEs) have to refocus on providing assurance regarding how well management identifies, evaluates, responds, and manages risks – including the controls that keep risk levels within organizational tolerances.”

The Problem With Unreported Income [You’re the Boss/NYT]
The problem being that if you’re going to have one helluva time selling your business if a decent portion of its revenues are unreported.

“Legal and moral issues aside, there is only one way to view unreported income when it comes time to sell the business: forget that money ever existed. If you can only manage what you can measure in business, then the same holds true for what you can sell.”

AIG hires ex-Lehman lawyer as compliance head [Reuters]
As long as AIG doesn’t ask about arcane accounting disclosures, this should work out fine.

Accounting News Roundup: UK Launches Probe of E&Y’s Final Lehman Audit; Revolving Door at SEC Scrutinized; Swiss Upper House Rejects Referendum | 06.16.10

UK watchdog launches Lehman audit probe [Reuters]
The UK’s Accountancy and Actuarial Discipline Board (AADB), investigative and disciplinary body for accountants, has started an investigation into the Ernst & Young’s final audit of Lehman Brothers’ UK operations for the year ending November 30, 2007.

E&Y, completely familiar with this drill, is sticking to their guns, “Ernst & Young’s audit opinion stated that Lehman’s financial statements for that year were fairly presented in accordance with the relevant accounting standards, and we remain of that view.”


SEC ‘Revolving Door’ Under Review [WSJ]
Currently, the SEC does not have a cooling off period for former staffers that take a position with a private firm. Former staffers (i.e. lower-level employees) need only to provide a written letter disclosing the fact that they will be representing their new employer in an investigation.

The Journal reports that Senator Charles Grassley (R-IA) announced on Tuesday that an investigation into the practice had recently been launched by the Inspector General David Kotz, “[W]e are currently conducting an investigation of allegations very recently brought to our attention that a prominent law firm’s significant ties with the SEC, specifically, the prevalence of SEC attorneys leaving the agency to join this particular law firm, led to the SEC’s failure to take appropriate actions in a matter involving the law firm,” Mr Kotz said.

The Journal reports that law firm in question “could not be determined.”

There have been several instances of quick transitions of former Commission staffers to new representing their new firms, including the most recent example of an attorney leaving the Division of Trading and Markets for the Chicago-based high frequency trading firm Getco, LLC and an accountant from the enforcement division who represented his new employer in a nonpublic investigation.

IRS hatches new assault on ‘Survivor’ [Tax Watchdog]
Thanks reality TV gods, Richard Hatch is still in our lives. He still owes $1.7 million in taxes from 2000 and 2001.

The CAE’s real challenge – ethics, courage, and complacency [IIA/Marks on Governance]
Norman Marks responds to a commenter that believes that a Chief Audit Executive need not focus on auditing and communicating those results and risks but instead “be conscious of and responsive to management expectations,” and basically substantiate that internal audit isn’t a giant waste of money.

Mr Marks questions this notion in its entirety, “It’s fine to supplement essential assurance activities with the tangible value-adding programs…But, the assurance work has to be covered or (in my opinion) internal audit is failing to do its job. When that is a conscious decision, I have to question the ethics – and the courage – of the individuals involved.”

Swiss Upper House Rejects Call for Referendum on UBS Pact [WSJ]
The upper house in Swiss Parliament would like their counterparts in the lower house to leave their popular referendum idea wherever they found it. Presumably everyone understands that super secret Swiss banking as the world knows it is over and lower house is a little slow to catch on. They’re supposedly debating the referendum circa now.

Class Action Complaint against Amedisys uses Sarbanes-Oxley Act Corporate Governance Provisions to Battle Alleged Corporate Malfeasance [White Collar Fraud]
Amedisys got caught red-handed by the Wall St. Journal abusing the Medicare system and Sam Antar hopes that this is a sign of things to come:

The SEC rules under Sarbanes-Oxley for public company codes of ethics broadly define corporate malfeasance by senior financial officers, requires such companies to promptly report any misconduct, prohibits companies from ignoring any misconduct, and makes it relatively easy for investors to sue for misconduct.

Hopefully, more lawsuits will cite code of ethics violations by public company senior financial officers in the future.

Accounting News Roundup: Ernst & Young Wants Lawsuit Dismissed; KPMG Study Finds Goodwill Impairments Slowing; Deloitte Names New Tax Partners | 06.07.10

Lehman, Nortel, Bank of America, Google in Court News [Bloomberg BusinessWeek]
Dick Fuld and the rest of the ex-Lehman Brothers management team as well as Ernst & Young asked a judge to throw out the lawsuit against them brought by the Alameda County Employees’ Retirement Association in Oakland, California, and the Government of Guam Retirement Fund.

This lawsuit focuses on the failed disclosure by Fuld et al. of the use of Repo 105 and E&Y’s confirmation of its usage as being in accordance with U.S. GAAP.


George Clinton in funk: Accountants sue Parliament-Funkadelic star over fees [NYDN]
GC engaged Wlodinguer Erk & Chanzis to audit his royalties from Universal Records and EMI in 2003. The firm claims that they have only been paid $25,000 while the agreement they had stated that WEC would receive 20% of the $1.2 million settlement Clinton received.

KPMG Study Shows Tapering Off in Goodwill Impairment [Compliance Week]
How bad of a year was 2008? KPMG’s recent study of goodwill impairment charges of 1,700 U.S. public companies found that ’08 was a bloodbath “KPMG’s study shows goodwill impairment charges across the 1,700 companies fell from $340 billion in 2008 to $92 billion in 2009. Only 12 percent of companies in the study took a charge for goodwill impairment in 2009 compared with 17 percent in the prior year.”

And of that bleeding, banks were considerably less involved, “The study showed the technology hardware sector accounted for 23 percent of total goodwill impairment charges in 2009, followed by telecommunication services. Banks had the highest level of goodwill impairment charges in 2008, but represented only 4 percent of the total goodwill charges in 2009.”

Inquiries mount after PwC ‘failed to notice’ mistakes [Times Online]
JP Morgan settled with the UK’s Financial Services Authority (“FSA”) last week over its mishandling of client funds, fining the bank £33.3 million. Now the Financial Reporting Council and the Institute of Chartered Accountants in England and Wales, who both oversee accountants in the UK, are now expected to launch inquiries into PwC’s role in JPM misallocation of client funds of £1.3 billion to £15.7 billion between 2002 and July 2009:

In addition to serving as principal auditor, PwC was retained by JP Morgan to produce an annual client asset returns report — a yearly certification to prove that customers’ funds were being effectively ring-fenced and therefore protected in the event of the bank’s collapse. But PwC signed off the client report even though JP Morgan was in breach of the rules.

MOVES-Barclays Wealth, Deloitte, BlueCrest Capital, RFIB [Reuters]
Reuters reports that Deloitte’s tax practice promoted eight new partners: Pippa Booth, Andy Brook, Stephen Brown, Christie Buck, Sue Holmes, Anbreen Khan, David McNeil and Marcus Rea and three associate partners: Andrew Cox, Ashley Hollinshead and Claire Wayman.

Accounting News Roundup: The SEC’s Hunt on Banks’ Repos Continues; McKenna Named as a Loeb Finalist; Pabst Gets a New Owner After IRS Order | 05.26.10

SEC Shakes Down Banks on Repurchase Accounting [Compliance Week]
The SEC has received information from 19 “financial institutions” on their repurchase accounting that could help determine if the treatment at Lehman Brothers was ” an outlier in classifying asset repurchase agreements as sales even when those assets were destined to return to the balance sheet.”

Compliance Week reports that Steven Jacobs, associate chief accountant in the Division of Corporation Finance at the SEC said that the Commission wants companies (i.e. banks) to be more forthcoming in their disclosures, “In a situation like this,s a snapshot in time.” Disclosures should more clearly describe the company’s economic situation and its liquidity apart from the moment-in-time snapshot, he said. “I would be willing to bet companies would be more willing to do that if that position on the balance sheet didn’t look as good.”


2010 Gerald Loeb Award Finalists Announced by UCLA Anderson School of Management [UCLA]
Congratulations are due to our own Francine McKenna (look for her column later today) who was named as a finalist for a Gerald Loeb Award for Distinguished Business and Financial Journalism in the “Online Commentary and Blogging Category” for her work at re:The Auditors.

Other nominees include Adrian Wooldridge, Steven N. Kaplan, Nell Minow, Patrick Lane, Brad DeLong, Luigi Zingales, Saugato Datta, Thomas Picketty and Chris Edwards for “Online Debates” for The Economist; David Pogue for “Pogue’s Posts” for The New York Times; Jim Prevor for “Business, Finances and Public Policy” for The Weekly Standard.

Rewarding Failure [Portfolio.com]
The old idea of combining the SEC and the CFTC came up again last week and Gary Weiss thinks that it’s a terrible idea. Be that as it may, he thinks that it may “have some mileage” since some big names have recently come out to support the idea, including Mary Schapiro who was posed the question “can you explain any rational reason that both the CFTC and the SEC exist?”:

Schapiro’s response was wordy, but it boiled down to a qualified “yes.” If it were up to her, she said, there would be just one agency. Headed by her, I presume.

Evidently this seems to be a trend. Only about a week ago, the idea was endorsed by Arthur Levitt, the former head of the SEC. He told Barron’s that merging the two agencies is “so basic to any kind of regulatory reform, that to neglect that is really outrageous.”

Gary argues that an independent CFTC could “light a fire under a somnolent SEC” with the right leadership, although the current team doesn’t seem to be up for the job. If that continues, he adds, we could end up with one large(r) ineffective bureaucracy protecting the markets.

Pabst’s New Owner Built Fortune on Old Brands [WSJ]
The Journal has learned that Pabst is being purchased by investor C. Dean Metropoulos who has made a fortune in food branding. His past investments include Chef Boyardee, Duncan Hines and several others.

Pabst was up for sale after the IRS forced the sale by California-based Kalmanovitz Charitable Foundation. The Foundation had owned the company for a decade, after the Service allowed a five year extension for the nonprofit to own a for-profit business.

Accounting News Roundup: Would IFRS Prevented Repo 105?; The Crazy Eddie Movie Hits a Snag; JP Morgan May Bolt Tax-Refund Loan Business | 04.29.10

Lehman case “backs” accounting convergence [Reuters]
Philippe Danjou, a board member at the IASB has been quoted as saying that Repo 105 would not have been allowed under IFRS, “From an IFRS perspective I would suspect that most transactions would have stayed on the balance sheet. It makes a case for convergence, it makes a case that we should not have different outcomes under different accounting standards when you have such big amounts.”

The G-20 asked the sages at both the FASB and the IASB to converge their rules by June-ish 2011 but some people don’t sec, as there are too many disparities on treatment of key issues between the two boards.


The Real Reason Behind Danny DeVito’s Crazy Eddie Movie Project Meltdown [White Collar Fraud]
Danny DeVito wants to make a movie based on the Crazy Eddie Fraud, which was perpetrated by, among others, Eddie and Sam Antar. The project has run aground primarily because of Eddie Antar’s life rights and the potential profit he would reap from the making of the movie. Danny D is disappointed by the developments and has sympathy for Eddie, discussing it in s recent Deadline New York article:

“He’s gone through tough times, and he’s not the aggressive tough guy they paint him to be,” De Vito said. “He’s in his 70s and the past has come back to bite us all in the ass. Peter [Steinfeld] and I told him we think there is a terrific story there, but we can’t do it with you involved, in any way. We’ve taken a breather, but we’re figuring out how to jump back in.

Sam Antar is not amused by this and chimed in with his side of the story:

Eddie Antar is plainly still in denial about his cowardice towards his own family and investors. There actually is a “family dynamic” that “explains Antar’s fall” as DeVito claims. However, Eddie Antar and other members of his immediate family are simply unwilling to give a truthful account of what really happened at Crazy Eddie, while Danny Devito is willing to accept Eddie Antar’s bullshit excuses for his vile behavior.

As Chipotle Sizzles, CFO Sells Stock [Barron’s]
Ten thousand shares at $144 and change will buy a bunch of burritos.

Medifast Lawsuit: Anti-SLAPP motions filed [Fraud Files Blog]
Back when we discussed forensic accounting, the aforementioned Sam Antar said that forensic accountants can look forward to “making many enemies in the course of their work and must be unhinged by the retaliation that normally follows uncovering fraud and other misconduct.”

Tracy Coenen, no stranger to this retaliation, is now fighting back against Medifast who has sued her and others for saying not so flattering things about the company:

Anti-SLAPP motions have been filed in the Medifast lawsuit by me and by my co-defendant, Robert FitzPatrick. My motion can be read in its entirety here, and Fitzpatrick’s can be read here.

SLAPP stands for Strategic Lawsuit Against Public Participation. It’s basically when a big company tries to shut up a little guy with expensive litigation. In my opinion, Medifast sued me and others in an attempt to get us to stop publicly analyzing or criticizing the company and it’s multi-level marketing business model.

In filing an anti-SLAPP motion, we are essentially asking the court to rule in our favor and in favor of free speech. Consumers should have the right to discuss, analyze, and criticize companies without the fear of expensive lawsuits.

JPMorgan May Quit Tax-Refund Loans, Helping H&R Block [Bloomberg BusinessWeek]
Bloomberg reports that JP Morgan may discontinue its financing of 13,000 independent tax preparers, a move that will benefit H&R Block, according to a competitor:

“Block is the biggest winner in this,” said John Hewitt, chief executive officer of Liberty Tax Service, a privately held company in Virginia Beach, Virginia, that also may benefit…

The reason HSBC is exiting this industry, even though they’re making $100 million a year in profit from it, is because of reputation risk,” Hewitt said in an interview. “Bankers don’t like the consumer advocacy groups picketing outside their offices.”

Refund anticipation loans (RALs) are attractive to clients that need cash immediately, based on their anticipated refund. The business is controversial because the high interest rates can drive people further into debt and consumer groups oppose them vehemently.

Funding for smaller shops that offer these loans will likely lose the business altogether as large banks like JP Morgan discontinue the financing, thus driving the business to franchise tax prep shops like H&R Block, Jackson Hewitt, and Liberty.

Accounting News Roundup: Audit Committee Chair Resigns from WellCare Health; PwC, E&Y Officially Cut Iran Ties; Repo 105 = Pointless, Repugnant Practice | 04.26.10

Director Resigns at Wellcare Health [WSJ]
Regina Herzlinger was the chair of the audit committee of WellCare Health Plans, Inc., a Tampa-based provider of Medicaid and Medicare plans, but resigned last week amid controversy around the company’s accounting practices. The Wall St. Journal reports that Ms Herzlinger said that internal audits discovered the company overbilled the Illinois Medicaid program by $1 million “and potentially overcharged states for almost $500,000 worth of maternity care.” She also stated that the company “ran afoul of Georgia’s requirements that it account for eachhich it paid providers, resulting in a $610,000 fine.”

WellCare also paid an $80 million fine to the State of Florida last May for a criminal investigation “into allegations that it had defrauded Florida benefits programs for low-income adults and children” as well as $10 million to the SEC for an investigation into its accounting. At least they’re keeping some attorneys busy.


Ms Herzlinger alleges that she was not renominated to her position on the board of directors for raising questions about the accounting practices at the WellCare as well as corporate-governance issues.

The Company claims that “good corporate-governance practices require it to bring in new board members periodically to provide a fresh perspective,” so at least they’ve got that point covered. The Journal also reports that the company is pulling the materiality card, saying that the “accounting errors Ms. Herzlinger identified were relatively small and the company’s own internal controls indentified them, indicating that its processes are working well.”

Lehman Investors Add Auditor Ernst & Young to Suit Over Deals [Bloomberg]
Charlie Perkins, the Lucas van Pragg of Big 4 accounting firms, has to be getting sick of repeating himself:

“Throughout our period as the auditor of Lehman, we firmly believe our work met all applicable professional standards, applying the rules that existed at the time.”

Countrywide Investors Said to Settle Lawsuit for $600 Million [Bloomberg BusinessWeek]
KPMG is listed as one of fifty defendants in the lawsuit in California.

Companies Feeling More Pressure to Cut Iran Ties [NYT]
PricewaterhouseCoopers and Ernst & Young have both cut their ties with Iran, following KPMG, the Times reports. This results in grand total of zero Big 4 firms with affiliates in Iran.

United Against Nuclear Iran (“UANI”) President Mark Wallace received letters from both PwC and E&Y:

This week, Mr. Wallace’s group received letters from both PricewaterhouseCoopers and Ernst & Young assuring the group that they had cut ties with Iranian firms. PricewaterhouseCoopers wrote that the Middle East member of the company’s global network had had a “cooperating firm relationship” with Agahan & Company, an Iranian firm, but that it expired last year. Ernst & Young said it cut its ties in 2001 to the Tadvin Company, one of Iran’s largest accounting firms, even though Tadvin was still listed on its Web site this year.

Mr. Wallace called that a breakthrough because by publicly avoiding Iran, the American accounting firms that audit so many other companies send an important signal. “What it says is if it’s too risky for the Big Four accounting firms,” he said, “it should be too risky for other companies.”

It’s pretty obvious Mr Wallace doesn’t know anything about Big 4 accounting firms re: risk.

A manifesto for accountants [Tax Research UK]
Richard Murphy has some suggestions for the Accountancy Age manifesto.

Repo 105 Explained With Numbers and Detail [The Summa]
“Right now, I just don’t see what the big fuss is all about. The number differentials are just too small. Although a repugnant practice, Lehman didn’t accomplish much of anything with Repo 105 use.”

The FASB Punts Repo Accounting to the SEC

It’s not surprising that FASB’s Bob Herz was called to submit comment on the House Financial Services Committee’s hearings on Lehman – more specifically, Public Policy Issues Raised by the Report of the Lehman Bankruptcy Examiner – and it’s even less surprising that Herz stated that the FASB will be ready when the SEC is to alter repo accounting rules should this be, you know, a big deal going forward.

As many of you already know, the FASB has a history of taking a reactive stance to accounting issues during the financial crisis (case in point: mark to market) and repo accounting is no exception. Sort of like the SEC cracking down on Madoff-esque Ponzi schemes after Madoff, it defeats the purpose as financial criminals very rarely repeat techniques that have already been uncovered and prosecuted. But oh well, showing up late to the party is still showing up and proves FASB is at least paying attention.


Herz’s testimony reinforces FASB’s position as standards setter, not regulator. Working with the SEC will allow the regulators to put together a case for accounting standards that could address repo accounting should the SEC discover it is widespread among financial firms but for now, FASB will be sitting back and waiting to see what the SEC comes up with.

As it turns out, FASB isn’t nearly as reactive as it appears on the surface: plenty of guidance already exists for handling these transactions and perhaps had Ernst & Young been looking hard enough, they would have easily found something amiss.

Said Herz:

When developing the guidance for determining whether a company maintains effective control over transferred assets, the FASB noted repo transactions have attributes of both sales and secured borrowings. On one hand, having a forward purchase contract is not the same as owning the asset. On the other hand, the contemporaneous transfer and repurchase commitment entered into in a repo transaction raises questions about whether control actually has been relinquished. To differentiate between the two, the FASB developed criteria for determining whether a company maintains effective control over securities transferred in a repo transaction.

Control? Is that was this about?

Regardless, FASB is prepared to offer even more guidance on the matter should current guidance not be sufficient to make sense of future contracts that could be used in a fraudulent manner. Of course, the financial criminals have likely already discovered a new, innovative way to hide liabilities or stash nasties off-sheet but instead of looking for those, the SEC will be working closely with FASB in the future to prevent another Lehman. History always repeats itself but, sadly, financial crimes rarely do. It appears our friends at FASB never got that memo.

Source: Discussion of Selected Accounting Guidance Relevant to Lehman Accounting Practices

Accounting News Roundup: Lehman Unsecured Creditors Want Ernst & Young Docs; Court Doesn’t Allow “Geithner Defense” for Non-Geithner Taxpayer; Contenders for the Head of Deloitte UK Shape Up | 04.20.10

Lehman unsecured creditors seek probe Ernst & Young [Reuters]
The unsecured creditors of Lehman are justifiably nervous about getting anything bank in the wake of the Lehman Brothers bankruptcy. The next best plan of attack, as you might of expect is poke around E&Y to see what they’ve got laying around. Of course Ernst & Young won’t just turn over “certain documents” and make “its employees and partners submit to an oral examination” so the creditors are asking the bankruptcy court to order them to do so.


Tax Court Rejects “Geithner Defense,” Says Reliance on TurboTax Does Not Excuse Taxpayer From Penalty for Errors on Tax Return [TaxProf]
Please note for any of you that will try to pull that excuse:

“Although the Court concludes the errors in petitioners’ tax preparation were made in good faith, petitioners have not established that they behaved in a manner consistent with that of a prudent person. Before the trial petitioners stipulated that they did not consult a tax professional or visit the IRS’ Web site for instructions on filing the Schedule C.

We do not accept petitioners’ misuse of TurboTax, even if unintentional or accidental, as a defense to the penalties on the basis of the facts presented.”

Contenders shape up to replace John Connolly – Deloitte’s big hitter [Times Online]
The head spot for Deloitte in the UK will be up for grabs next year as John Connolly will step down after ten years at the helm. The Times Online reports that even though two candidates have been identified by sources, no campaigning will be allowed, “Mr Connolly conceded that the issue of succession was “in the air” but said that the firm wanted to avoid open competition between potential successors. “We don’t allow people to go around the country calling meetings and giving presentations about why they will be a great leader,” he said.”

Fuld: Ernst & Young “Supported” Lehman’s Repo 105 Treatment

Dick Fuld has a big date with the House Financial Services Committee tomorrow and he’s going to say that he knew absolutely nada about Repo 105 until that nasty little report came out last month.


Fuld will also state that Repo 105 complied with GAAP and that Ernst & Young “reviewed that policy and supported the firm’s approaf the relevant rule, FAS 140.” Further, E&Y was “auditing our financial statements and reviewing our quarterly and annual SEC filings. Each year, E&Y issued formal opinions that Lehman’s audited financial statements were fairly presented in accordance with GAAP, and they were.”

Presumably E&Y will be okay with this since they’re standing by their audits of LEH so we’re sure no one at 5 Times Square will be interested in tomorrow’s testimony.

Full testimony, via Deal Journal:

Mr. Chairman, Ranking Member Bachus, and Members of the House Committee on Financial Services, you have invited me here today to address a number of public policy issues raised by the Lehman Brothers bankruptcy report filed by the Examiner.

Since September of 2008, I have given much thought to the financial crisis and the perfect storm of events that forced Lehman into bankruptcy. Everyone’s focus is now on how to prevent another crisis. The key is how regulation and governance should be deployed going forward to better protect the financial markets and the entire system.

The idea of a “super regulator” that monitors the financial markets for systemic risk, I believe, is a good one. To be successful in today’s challenging environment, this new regulator should have actual experience and a true understanding of the business of financial institutions, the capital markets and risk management and must be given the resources sufficient to accomplish its important mission.

My view is that the new regulator also should have access, on a real-time basis, to all information and data regarding transactions, assets and liabilities, as well as current and future commitments. In addition, we should put in place established and effective methods of communication between the regulator and the firms being regulated, all of whom should be guided by clear standards for capital requirements, liquidity and other risk management metrics. The job of the new regulator can only be done, in my opinion, with the creation and utilization of a master mark-to-market capability that determines valuations and capital haircuts on all assets, commitments, loans and structures. In short, to have a fair and orderly market, I believe we need a single set of transparent rules for all of the participants.

You have asked specifically about the role of the SEC and the Federal Reserve Bank of New York. Beginning in March of 2008, the SEC and the Fed conducted regular, at times daily, oversight of Lehman. SEC and Fed officials were physically present in our offices monitoring our daily activities. The SEC and the Fed saw what we saw, in real time, as they reviewed our liquidity, funding, capital, risk management and mark-to-market processes. The SEC and the Fed were privy to everything as it was happening. I am not aware that any data was ever withheld from them, or that either of them ever asked for any information that
was not promptly provided. After an extended investigation into Lehman’s bankruptcy, the Examiner recently published a lengthy report stating his views.

Despite popular and press misconceptions about Lehman’s valuations of mortgage and real estate assets, liquidity, and risk management, the Examiner found no breach of duty by anyone at Lehman with respect to any of these.

Speaking of asset valuations, the world still is being told that Lehman had a huge capital hole. It did not. The Examiner concluded that Lehman’s valuations were reasonable, with a net immaterial variation of between $500 million and $2.0 billion. Using the Examiner’s analysis, as of August 31, 2008 Lehman therefore had a remaining equity base of at least $26 billion. That conclusion is totally inconsistent with the capital hole arguments that were used by many to undermine Lehman’s bid for support on that fateful weekend of September 12, 2008.

The Examiner did take issue, though, with Lehman’s “Repo 105” sale transactions. As to that, I believe that the Examiner’s report distorted the relevant facts, and the press, in turn, distorted the Examiner’s report. The result is that Lehman and its people have been unfairly vilified.

Let me start by saying that I have absolutely no recollection whatsoever of hearing anything about Repo 105 transactions while I was CEO of Lehman. Nor do I have any recollection of seeing documents that related to Repo 105 transactions. The first time I recall ever hearing the term “Repo 105” was a year after the bankruptcy filing, in connection with questions raised by the Examiner.

My knowledge, therefore, about Lehman’s Repo 105 transactions, and what I will say about them today, is based upon my understanding of what I have recently learned.

As CEO, I oversaw a global organization of more than 28,000 people with hundreds of business lines and products and with operations in more than forty countries spread over five continents. My responsibility as the CEO was to create an infrastructure of people, systems and processes, all designed to ensure that the firm’s business was properly conducted in compliance with the applicable standards, rules and regulations.

There has been a lot of misinformation about Repo 105. Among the worst were the completely erroneous reports on the front pages of major newspapers claiming that Lehman used Repo 105 transactions to remove toxic assets from its balance sheet. That simply was not true. According to the Examiner, virtually all of the Repo 105 transactions involved highly liquid investment grade securities, most of them government securities. Some of the newspapers that got it wrong were fair-minded enough to print a correction.

Another piece of misinformation was that Repo 105 transactions were used to hide Lehman’s assets. That also was not true. Repo 105 transactions were sales, as mandated by the accounting rule, FAS 140.

Another misperception was that the Repo 105 transactions contributed to Lehman’s bankruptcy. That was not true either. Lehman was forced into bankruptcy amid one of the most turbulent periods in our economic history, which culminated in a catastrophic crisis of confidence and a run on the bank. That crisis almost brought down a large number of other financial institutions, but those institutions were saved because of government support in the form of additional capital and fundamental changes to the rules and regulations governing banks and investment banks.

The Examiner himself acknowledged that the Repo 105 transactions were not inherently improper and that Lehman vetted those transactions with its outside auditor. He also does not dispute that Lehman appropriately accounted for those transactions as required by Generally Accepted Accounting Principles.

I have recently learned that, in 2000, the Financial Accounting Standards Board published detailed accounting rules for transactions of this very type, described them and dictated how they should be accounted for. In 2001, Lehman adopted a written accounting policy for Repo 105 transactions that incorporated those accounting rules. E&Y, the firm’s independent outside auditor, reviewed that policy and supported the firm’s approach and application of the relevant rule, FAS 140.

As I now understand it, because Lehman’s Repo 105 transactions met the FAS 140 requirements, that accounting rule mandated that those transactions be accounted for as a sale. That was exactly what I believe Lehman did. Lehman should not be criticized for complying with the applicable accounting standards.

In other words, those transactions were modeled on FAS 140. The accounting authorities wrote the rule that expressly provided for those transactions and how they should be accounted for. To the best of my knowledge, Lehman followed those rules and requirements.

My job as the CEO was also to put in place a robust process to ensure that Lehman complied with all of its obligations to make accurate public disclosures. I had hundreds of people in the internal audit, finance, risk management and legal functions to ensure that we did, in fact, comply with all of our obligations.

Part of that process was E&Y’s role in auditing our financial statements and reviewing our quarterly and annual SEC filings. Each year, E&Y issued formal opinions that Lehman’s audited financial statements were fairly presented in accordance with GAAP, and they were.

We also had in place a rigorous certification process that was carried out in advance of every annual and quarterly SEC filing. That bottom-up process involved hundreds of people who had first-hand knowledge of the firm’s day-to-day business and the responsibility to review for accuracy and compliance the firm’s SEC disclosures before they were filed.

Before we made any annual or quarterly filing, the key people who were involved in this process signed certifications confirming that, to their knowledge, the filing did not contain any untrue statement of a material fact or any material omission and that it fairly presented Lehman’s financial position.

Our certification process culminated, every quarter, with a mandatory, allhands, in-person meeting, which was chaired by Lehman’s Chief Legal Officer. In addition to me, that meeting was attended by the firm’s President, Chief Financial Officer, Financial Controller, Executive Committee members, business heads, the principal internal audit, finance and risk managers, legal counsel and our outside auditors.

After we had reviewed the draft annual or quarterly filing in detail, the Chief Legal Officer and I would each ask everyone present to speak up if there was anything in the document that caused them concern, or if anything had been omitted that they thought should be included. Attendees were also told that they should speak separately with the Chief Legal Officer if they had an issue that they did not want to raise at the meeting. To my knowledge, no one ever, at any of those meetings, raised any issue about Repo 105 transactions.

I relied on this certification process because it showed that those with granular knowledge believed the SEC filings were complete and accurate. I never signed an SEC filing unless it was first approved by the Chief Legal Officer. Mr. Chairman, I thank you for allowing me to speak on these issues and I will be pleased to answer any questions this Committee may have.

Accounting News Roundup: Over 50% of CFOs Aren’t Planning on Salary Increases; Americans Don’t Trust Politicians; PwC Cleans Up on Lehman Bankruptcy | 04.19.10

National survey finds employee wages and bonuses to remain stagnant over next six months [GT Press Release]
All the excitement (or lack thereof) amongst the Big 4 about raises this year will, at least for the next six month, will be rare compared to other companies. Grant Thornton’s survey of CFOs revealed that 53% don’t expect any salary changes in the next six months while 32% plan for decreases. That leaves a whopping 15% of those left in the survey that are planning wage and bonus increases over the next six months.


Poll: 4 out of 5 Americans don’t trust Washington [AP]
So if you’re interested in running for office, this may be the year to do it.

PwC’s Administration of Lehman Translates to $24,000 Per Hour! [The Big Four Blog]
Naturally in most situations, there are winners and there are losers. While Ernst & Young is looking like a giant loser in the Lehman Brothers bankruptcy, the whole thing seems to have worked out well for PricewaterhouseCoopers.

TBFB reports that, as the administrator for the UK piece of Lehman, the firm has gained control of over $48 billion in assets. Costs associated with these services (in the 18 months since the bankruptcy) are 0.65% of the assets recovered. A quick punch of your 10-key reveals that this is around $312 million or $24,000/hour.

Did Lehman’s Arrangement with Hudson Violate Accounting Principles?

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

I’m far from the only person having a hard time understanding the significance of the deals arranged by a company that this page one New York Times story referred to as Lehman Brothers’ “alter ego.”

From the looks of it, the company in questastle, was set up simply to serve in the traditional role of outside investor in another company’s off-balance-sheet financing vehicle, which is known as a special purpose or variable interest entity to accountants and a conduit or structured investment vehicle in the world of banks.

The arrangement is common enough and there’s nothing wrong with it, strictly speaking, so long as the outside investor is independent of the sponsor of the entity and the arrangements are properly disclosed.


Remember Citigroup’s SIVs? They spawned the first ill-fated bank bailout effort, by former Treasury Secretary Henry Paulson. And they were similar to the entity that Hudson created for Lehman, called Fenway.

The problem with these gizmos, of course, is that sponsors often claim not to be responsible for the assets and yet end up on the hook for them anyway, which is what happened to Citi. But that in itself doesn’t make them fraudulent, at least not according to GAAP.

In Lehman’s case, the problem seems to be that Hudson was controlled by Lehman, if not at the time it was created, then certainly under later rules, according to Charles Mulford, an accounting professor at the Georgia Institute of Technology and an advisor to CFOZone.

At first glance, it seems like the opposite might be the case, since Lehman reportedly dominated Hudson’s board when it was created in 2001. And Lehman’s influence over Hudson diminished significantly in 2004, when its board seats were reduced from five to one, presumably along with Lehman’s equity in the firm.

Just conceivably, that might have been done to conform with the changes in the accounting rules. But Mulford says that might not have been enough to comply, because the new rules require the so-called primary beneficiary of the vehicle to consolidate its assets regardless of how much equity the outside investor has in it. Even after 2004, Lehman remained the single largest investor in Hudson, according to the Times.

“Given changes to accounting for SPEs, one could argue that Lehman had effective control of the Hudson Castle SPEs, even if it didn’t have voting control, necessitating consolidation,” Mulford said in an email to CFOZone.

Of course, the significance of the arrangement remains unclear, as the Times article failed to explain how much of Lehman’s debt was shifted into the Fenway SPE. It looks as if at least $3 billion was shifted into Fenway in this fashion, but that’s a lot less than the $50 billion Lehman shifted off of its balance sheet through so-called Repo 105 transactions in 2008.

Incidentally, while Lehman’s auditor Ernst & Young recently claimed that amounts Lehman shifted in this fashion weren’t sufficient to cause the firm’s failure, since its total assets exceeded $600 billion, I just saw in the bankruptcy examiner’s report that the firm refused to say the amounts weren’t immaterial when it signed off on Lehman’s financial statements. And the examiner’s report insisted that they were indeed material.

Accounting News Roundup: More Dodgy Accounting from Lehman Brothers; Deloitte Announces $100 Million Investment in China; Less Than 100% of Tea Partiers Believe They are Overtaxed | 04.13.10

Lehman Channeled Risks Through ‘Alter Ego’ Firm [NYT]
That alter-ego firm is Hudson Capital and the Times reports that while HC “appeared to be an independent business, it was deeply entwined with Lehman,” citing a Board of Directors controlled by the bank, Lehman’s 25% ownership, and many former LEH employees working at HC. Hudson reportedly provided LEH with financing “while preventing ‘headline risk’,” but the relationship was designed specifically to maximize the utility of Hudson “without jeopardizing the off-balance sheet accounting treatment,” according to memo cited by the Times.


Deloitte To Spend More Money In China For Business Expansion [Dow Jones]
Deloitte is investing $100 million in China over the next three to five years, hiring 1,000 to 2,000 new employees per year, per Global CEO Jim Quigley and Deloitte China CEO Christopher Lu. This follows a five-year, $150 million investment by the firm announced in 2004.

Quigely told Dow Jones, “When I have made my investment decisions as the CEO of Deloitte, the market where we are investing the most is in China. We’ve now expanded. So another $100 million is coming this direction as we continue to want to grow our business here, and take advantage of the opportunities available to serve China companies and to serve companies outside of China who want to invest here.”

66% Say America Is Overtaxed [Rasmussen via TaxProf]
If you needed a poll that shows that Americans hate taxes in order to convince you, Rasumussen is all over it. 66% of people surveyed believe Amecians are overtaxed, as opposed to 25% who disagree. The issue is severely divided politically with 81% of Republicans believing they are overtaxed as opposed to Democrats who were split on the issue. 73% of those surveyed that did not affiliate with either party believe they are overtaxed while 96% of the Tea Party movement believe they are overtaxed.

The PCAOB Is the Latest Headache for Ernst & Young

Charlie Gasparino is on E&Y like stink on a monkey this week. After reporting yesterday that the SEC may eventually get around to charging Dick Fuld and/or Ernst & Young for the accounting hijinks at Lehman Brothers, CG is now reporting that the PCAOB is asking all kinds of questions that E&Y would rather not answer.


Not exactly great news from CG so we emailed E&Y spokesman Charlie Perkins to see what’s what. He declined to comment and said the firm would not be releasing a statement related to this report.

We also called up the PCAOB to get their take and spoke with Colleen Brennan, Deputy of Director of Public Affairs, who said that the Board is prohibited from discussing these matters and provided us with the details:

The PCAOB cannot comment on whether it is investigating a particular registered accounting firm or a particular public company audit by a firm. The Board, however, takes all allegations of improper professional conduct by a registered public accounting firm seriously and considers all information relating to such allegations.

PCAOB investigations and contested contested disciplinary proceedings are confidential under the Sarbanes-Oxley Act. The PCAOB’s inventory of enforcement matters includes audits of all sizes and varying complexity, including matters related to audits by large firms for issuer audit clients involved in the financial crisis.

So no one is talking. Fine, we’ll just have to take Charlie at his word. What we do know is that if the Board does decide to lay the smackdown on E&Y, they’re going to tell the entire universe about it via its “Disciplinary Orders,” and as CG notes in his report, if the PCAOB does bring an action against E&Y it will be the highest profile enforcement action in its short history. Not exactly a BusinessWeek list.

Ernst & Young Probed Over Role in Lehman Bankruptcy [FBN]

SEC Might Bring Civil Charges Against Ernst & Young Soon, Maybe

Charlie Gasparino is reporting that the SEC probe in the Lehman Brothers bankruptcy is “ramping up” and that the Commission is under hella-pressure to bring civil charges against Dick Fuld, Ernst & Young and whoever else is on the list.

It’s unclear if the SEC can muster the necessary proof to show that top executives like former CEO Richard Fuld or the firm’s outside auditor Ernst & Young intentionally misled investors about the health of Lehman’s balance sheet in the months before it filed for bankruptcy in mid-September 2008, according to people close to the probe…It’s unclear when any charges might be filed by the SEC, but people close to the inquiry say the SEC believes it does bring one, it must do so “very soon,” possibly within a few months given a combination of the outrage over the report’s findings and that Lehman’s bankruptcy is going on two years old.

Okay, so things are urgent but not that urgent. It’ll be Father’s Day maybe the 4th of July by the time we get a Mary Schapiro smackdown.

But that’s not all! Things are really serious at Ernst & Young now because Charlie reports that E&Y “has hired high-profile white-collar attorney William McLucas as its outside counsel in the matter, people close to the firm say. McLucas had been the SEC’s enforcement chief before entering private practice.” We checked with our friends over at ATL and it turns out that Mr McLucas is a partner at high-powered WilmerHale and was lead counsel to the special committee of the Enron Board that reported “hard-hitting findings” (sayeth he).

Since Mr McLucas doesn’t take shit from the likes of short-seller Jim Chanos, we’ll take Charlie’s word that things are pretty serious over at 5 Times Square.

E&Y spokesman Charlie Perkins declined to comment.

SEC Probe of Lehman Picking Up Steam [FBN]
See also:
Gasparino: SEC May Be Forced To Do Something About This Whole Lehman Thing [DB]

Compensation Watch ’10: Ernst & Young Still Planning on Merit Increases

A little more from inside E&Y to round out the week. We got a tip earlier in the week that there was an oddly-timed town hall going on in Chicago this week. Our tipster indicated that the meetings usually occur after the June 30 year-end or in September.

We asked around and from the sounds of it, the meeting amounted to an extremely sober pep rally. The need for a little HR cheerleading is completely understandable, considering the month E&Y has had.


“[T]hey just talked about how they know morale is down, yet no plans for how to fix it. Additionally, they said there would be raises this year, but no mention of how large or small…[and] your basic HR ‘Thank’s for your help’ stuff.”

We haven’t heard the details for the cause “low morale” but it’s quite possible that it could be due, at least in part, to the ehmanlay rothersbay uckshowfay. Plus, busy season is in the home stretch and most people are just over it at this point. As far as fix for morale, our suggestions of Canadidan Tuxes, Timberlands and Hitler videos are obviously being ignored with extreme prejudice. We’re all out of suggestions. Maybe they aren’t the best ideas but at least we’re trying.

The silver lining here is that comp increases are still on the agenda after the initial announcement made by Steve Howe back in January. If they go back on this promise — we’re confident they won’t — you can just blame it on Dick Fuld.

After Constant Lehman/Ernst & Young Press Coverage, the PCAOB Is Ready to Get Serious About Audit Committee Communication

So maybe you heard about Ernst & Young and how they kinda, sorta didn’t bring up the shady accounting going on over at Lehman Brothers to the audit committee until a Matthew Lee, your fired whistleblower du jour, brought it up. Some people have suggested that if E&Y had made a single peep about this prior to, say, 2008, maybe we wouldn’t be having this discussion (okay, we’d probably still be having it).


The controversy over this incommunicado has now jolted the PCAOB into action as the they have announced an open meeting for Monday at 9:30 am sharp. Basically, they want to feel everyone out on a standard for required communication for auditors with the audit committees.

As Emily Chasan of Reuters notes, “The PCAOB has considered issuing rules on this issue for the past several years to formalize ways that auditors are expected to communicate with the audit committee of the company they are auditing,” but in classic reactionary fashion, nothing has been done up to this point. Now that we’ve had bankruptcy reports, recycled stories in the press, E&Y hating back the haters, and everything else in this shitstorm, the PCAOB is ready to talk about this.

So, if you’ve got no plans on Monday morning and happen to be in DC, head over to hear the discussion and throw in your $0.02. In the meantime, we’d love to hear some of your suggestions for mandatory talking points from the serious (e.g. accounting treatment that makes the partner even slightly queasy) to the über-ridiculous (e.g. biggest whore on the audit team).

Quote of the Day: Bank of America’s Statement Sounds Familiar | 03.24.10

“Efforts to manage the size of our balance sheet are routine and appropriate, and we believe our actions are consistent with all applicable accounting and legal requirements.”

~ Bank of America statement on the allegations that they engaged in balance sheet manipulation. A statement not so different from Ernst & Young’s on their final audit of Lehman Brothers.

Accounting News Roundup: Dodd Requests Investigation of Lehman “Accounting Manipulation”; Ernst & Young Makes Case to Audit Committee Members; House Passes Health Care Reform | 03.22.10

Dodd Seeks U.S. Inquiry Into Lehman’s Accounting [DealBook]
Late on Friday, Senator Chris Dodd (D-CT) sent a letter to Attorney General Eric Holder requesting that the Department of Justice investigate Lehman Brothers’ “accounting manipulation” that contributed to its bankruptcy. According to his letter, Dodd also wants the DOJ to investigate “other companies that may have engaged in similar accounting manipulation with a view to prosecution of employees or agents who contributed to any violations of the law.”

With the exception of Lehman, Dodd did not name any companies specifically. He wrote, “We must work tirelessly to reduce the incidence of financial fraud in order to restore trust and confidence in the financial markets. A task force investigation and taking appropriate Federal actions in these matters will contribute to these goals.”


An Ernst & Young Response: Dear Audit Committee Member… [Re: The Auditors]
Ernst & Young is on the offensive, telling everyone who will listen their position on the results of the Bankruptcy Examiner’s report. The ubiquitous Enron and Andersen comparisons in the MSM — while cliché and misleading — have motivated E&Y to reach to audit committee members that ulitmately decide whether E&Y will be providing services to their companies. Francine McKenna posted the letter noting, “I guess they know where their bread is buttered: With the guys who hire and fire them in the Fortune 500.”

The firm addresses everything from the actual accounting, “The media reports that these were ‘sham transactions’ designed to off-load Lehman’s ‘bad assets’ are inaccurate,” to whistleblower Matthew Lee’s letter, “When we learned of the letter, our lead partner promptly called the Audit Committee Chair; we also insisted that Lehman’s management inform the Securities & Exchange Commission and the Federal Reserve Bank of the letter.”

Naturally, the firm plans to defend themselves vigorously stating, “EY is confident we will prevail should any of the potential claims identified against us be pursued.”

Obama Hails Vote on Health Care as Answering ‘the Call of History’ [NYT]
Last night, the Senate bill was approved by the House, 219-212, and it could be headed back to the Senate for final approval as early as this week. In a shocker, Democrat and GOP views on the bill don’t seem to be converging as one Dem legislator described it as “the Civil Rights Act of the 21st century,” while a GOP member described the bill as, “a fiscal Frankenstein.”

Quote of the Day: Did the Ernst & Young Webcast Mention This? | 03.19.10

“I believe the manner in which the Firm is reporting these assets is potentially misleading to the public and various governmental agencies.”

~ Matthew Lee, former Lehman Brothers Senior VP in charge of consolidated and unconsolidated balance sheets, in a letter to certain LEH executives. He was fired.

Accounting News Roundup: GOP Says Healthcare Bill Will Expand IRS ‘Tentacles’; Jonathan Weil Counts Some of E&Y’s Bodies; RIP Jerry York | 03.19.10

GOP targets IRS in latest health battle [The Hill via TaxProf]
The GOP is still fighting the health care bill tooth and nail and this may be the most effective strategy we’ve seen so far. Forget about debating coverage, preexisting conditions, etc. etc. Just name drop the IRS and a large group of people may change their minds about the whole thing.

“This is a vast expanse of power,” said Rep. Charles Boustany Jr. (R-La.) during a Thursday call organized by Republicans on the Ways and Means Committee. He said the IRS provisions in the healthcare bill “dangerously expand, in an ominous way, the tentacles of the IRS and its reach into every American family.”

On the surface this appears to be the typical GOP “the IRS is eeeevilllll” pandering but the real concern should be that the Service already has a lot to do. The Hill reports that if taxpayers are required to purchase health care insurance but fail to do so they could face fines. The IRS would be responsible for administering and collecting these fines.

Add that to this small task, “The IRS retrieved $2.35 trillion in 2009 by processing 236 million tax returns. It also is working to reduce a $345 billion gap in the taxes it collects and should collect.” Not to mention they’re trying to update systems, answer more phone calls, getting into high speed car chases. There’s always a lot going on.

And in case Rep. Boustany needs caught up, the Service is already auditing more people and trying to collect every dime nickel penny it can.

Lehman’s Auditor Goes Blind From the Cooking [Bloomberg]
Jonathan Weil is not buying what Ernst & Young is selling. He reports that E&Y spokesman Charlie Perkins denied that the firm had “mischaracertized [the Bankruptcy Examiner’s] findings,” and characterized it this way, “[B]y E&Y’s twisted logic, it would be possible for a company to lie in its financial statements about its off-balance-sheet liabilities, and still manage to account correctly for them in the same financial statements. Imagine that.”

Weil takes off the gloves and digs up some old bodies, namely: partners recently sentenced to prison time for tax shelters; Bally’s (including vice chair Randy Fletchall); HealthSouth; Cendant (man, he’s going way back). Weil then thinks out loud, “With that kind of track record, it’s a wonder anyone would accept anything this firm says at face value again.”

Jerry York, Iconic CFO, Dies at 71 [CFO]
Served as CFO for IBM, Chrysler. Adviser to Kirk Kerkorian and board member at Apple.

Quote of the Day: Mary Schapiro Is Being Coy | 03.18.10

“It is safe to assume that we are looking at the conduct of a number of firms.”

~ Mary Schapiro, to a House appropriations subcommittee, not specifically naming Lehman Brothers or Ernst & Young.

Former SEC Chairman Pitt: Criminal Prosecutions Are Possible for Ernst & Young, Lehman Execs

Okay then! Not exactly what you’d want to hear from a former SEC Chairman on Monday but what’s a former SEC honcho to do? Paint a rosy picture for everyone? Hell no! The man is gong to get real about this latest bank/accounting firm disaster. Barron’s ran down Harv to get his $0.02 on the whole Lehman/E&Y sitch and he he laid it out for Dick Fuld, E&Y, et al. as how to best handle this dicey situation.

Regarding the timing of a response to the report, you best explain yourselves ASAP and while you’re at it, none of that fancy-schmancy language. Everyone needs to be able to understand this:

If they want to avoid the logical consequences of the Report’s conclusions-and none of those consequences are at all good for either Fuld or E&Y-they will need to come forward quickly with a very plain, easily understandable explanation of the errors or their defenses. The longer it takes them to do that, the less likelihood they will have of mitigating the publicity the Report’s allegations have already received.

Consequences, you ask? How about indictments? How about no more SEC clients for E&Y? Next Andersen? Maybe! Shockingly, the SEC seems to be dragging its feet, per the usual standard operating procedure (emphasis original):

Many are wondering why there hasn’t been any action taken, and why the government hasn’t reported on the same events itself. Criminal prosecutions are possible, as are SEC civil actions. For Fuld, an SEC action could mean that he would forfeit his right to participate in the securities industry and possible disgorgement of monies he received over the years from Lehman. For E&Y, the SEC has the power to suspend their right to practice accounting, limit their ability to take on new clients, and impose remedial sanctions.

Yeah, that last part is kind of the crux. As you may recall, Andersen did not bite the dust because of the money it had to pay to Enron investors but because it’s reputation took such a bad hit that states began revoking their license even before the firm voluntarily surrendered its license to practice before the SEC. This occurred after Andersen clients started running away from the firm like a band of lepers. There’s no indication that’s what will happen to E&Y but there’s a 2,200 page report with E&Y’s name all over that says nothing flattering about the firm.

And say what you want about Harvey Pitt: bearded Bush yes-man, lawyer, whatever. As far as we can tell, he has nothing to gain by throwing out wild-ass speculation about what the possible outcomes could be.

Lehman: Criminal Prosecution Possible, Says Pitt [Barron’s]

Inside Ernst & Young: Talking Points on Lehman Brothers

If you’ve ever worked at a Big 4 firm, you’re aware that when big news hits the MSM, A) it’s never good and B) there is typically some sort of communication from management reiterating the firm’s position on the matter, everything is cool, thanks for your hard work, etc. etc.

With last week’s revelation of the bankruptcy examiner’s report on Lehman Brothers, E&Y seems to be following this protocol as it relates to the troops on the ground. As you would expect, leadership is keeping their heads about this while in the background in-house counsel is likely engaged in all-night smoky room strategy sessions.

We checked in with a few of our Ernst & Young sources to get an idea of what people were thinking and so far, there doesn’t sound like there are any signs of panic (yet!).


From one source:

Overall reaction from what I gathered is pretty muted. We did get a call from some of the higher-ups saying that we reviewed our work and that we feel that our audit was completely adequate and that Lehman’s failure was nothing more than the same systemic failure of two of the other major banks and that we plan to defend ourselves vigorously. Presumably, the examiner’s report really didn’t give any ah-ha moments….

[I]s there a possibility of a payout at some point? It’s possible. Are we worried that we’re the next Arthur Andersen? I don’t think so.

So at least on the surface, E&Y leadership is communicating that what came out in the report wasn’t surprising and that the defense of the firm’s position will be, as usual, vigorous.

That doesn’t of course stop the speculation:

I heard from a technical guy there was some concern because they didn’t issue a going concern opinion [for the previous audit].

And as you might expect, “I heard that [the firm] helped cook the books and is deep shit,” with the book cooking being arguable but pretty hard to prove and the “deep shit” aspect being a given.

Some Ernst & Young partners are probably losing sleep just thinking about the potential liability involved here but eventually they’ll get over it (until something else comes up).

No partner worth their salt got admitted to the partnership focusing on the downside. The problem is that when people use consistently use words like “deceptive” and “misleading” to describe Lehman’s accounting this reflects poorly on the firm since they were comfortable with the treatment.

And because it’s still busy season for a lot of people, they are focused on the shitstorm that currently surrounds them, not one that will likely drag on for years after they’ve left the firm (voluntarily or otherwise).

Anyone with more insight or thoughts on the matter, get in touch with us and we’ll keep you updated on the chatter inside E&Y.

Quote of the Day: Ernst & Young Partners Losing Sleep? | 03.12.10

“A successful lawsuit against E&Y could result in a court finding that the failure to properly advise the audit committee prevented Lehman from taking genuine steps to substantially reduce its leverage, which may have saved the firm from bankruptcy. Which is to say, E&Y could find itself blamed for all the losses to Lehman shareholders. That would be a stretch – such a claim would be speculative – but it still should be scaring the heck out of the partners.”

~ John Carney

One Accountant Was Enough to Discuss Lehman’s Accounting on CNBC

Maybe it’s because everyone is still working like crazy and couldn’t get away for a TV appearance. Maybe Jim Turley couldn’t find decent footwear but how CNBC managed to get only ONE accounting expert in on this panel to talk about the Ernst & Young, Dick Fuld, et al. Sarbanes-Oxley and the Repo 105 is beyond our comprehension. Throw in four journalists and a “fellow” and you’ve got yourself quite the free-wheeling discussion on the double-entry system.


Personally, “[N]ot technically violating the rules, that’s why the auditors could kind of sign off on it even though it was incredibly misleading and deceptive,” was our favorite line.

But the poor accounting expert seemed to be a nervous wreck. Aren’t wet bars standard?

Auditor

Are Big 4 Auditors Irrelevant?

Okay people, the calls for the complete obliteration of the accounting world have begun. Check that. It’s more or less the accounting world as it relates to auditors of public companies (i.e. Big 4 auditors).

Steve Goldstein at MarketWatch, for one, is NOT A FAN, “What precise purpose does it serve to have a supposedly independent auditor (paid for by the company) sign off on accounts? From Enron to Lehman to Satyam to Parmalat, it’s clear that the major accountants lack either the skill or the determination (or both) to ferret out fraud.”


So in case you didn’t catch it, he’s calling into question the Big 4’s (our assumption) integrity, competence and fortitude. Oh and before you start huffing about “it’s not the job of the auditor to detect fraud,” we’d argue that’s not even the point any more. Lehman was engaging in what a former CFO calls “shenanigans” that E&Y knew about for years and went along with it. Why? Because Lehman said everything was kosh.

Goldstein goes on:

Company executives already are forced to sign off on their accounts. When they are caught lying, companies face liability over disclosure.

So the threats that keep (some) companies honest are there regardless of whether the reports are audited. The outside auditors themselves are assigned a negligible value by the market.

A solution? Here’s two admittedly out-there solutions that the Securities and Exchange Commission probably won’t adopt.

One is quite simple: get rid of accountants. Who cares? They add no value, and their expenses weigh on the bottom line.

The other would be for someone else to hire the accountant. How about the company’s top five shareholders? While the likes of Fidelity would grumble about the added costs and the free-rider benefit for smaller shareholders, they would certainly have an interest in securing a far tougher audit.

Okay, Big 4 auditors, here’s your homework: explain why auditing for public companies isn’t irrelevant. We’ll listen, we swear. Or just start shooting off at the mouth if you feel it necessary. Goldstein isn’t the first to make this determination. Francine McKenna and Jim Peterson have argued that the value of an auditor’s opinion has been nil for quite some time and they’re both Big 876454 alums. It’s okay if you admit it. Acceptance is the first step.

What exactly is the point of having accountants? [MarketWatch]

Lehman Brothers sign removal

Ernst & Young Was ‘Comfortable’ with Lehman’s Shady Accounting

Late yesterday, U.S. Bankruptcy Examiner Anton Valukus released a 2,200 page report that details the collapse of Lehman Brothers. It points the finger at Lehman execs for engaging in shady accounting that Ernst & Young knew about and was comfortable with. Lehman’s Board of Directors were not informed of the questionable accounting treatment.

To put it in more technical terms: Ernst & Young is in deep shit. The lead partner on the Lehman audwed more times than Dick Fuld for crissakes.

The accounting in question was known inside Lehman as “Repo 105.” These transactions moved billions of dollars off of Lehman’s balance sheet that were described by emails in the report as “basically window dressing” and their global financial describing them as having “no substance.” The Times reports that the treatment was so crucial to LEH that one executive, Herbert McCade, was known internally as the “balance sheet czar” and that he described in an email that the treatment was “another drug we r on.”


The really bad part for Ernst & Young is that they were okay with the “drug.” From the report, the lead partner stated that E&Y “had been aware of Lehman’s Repo 105 policy and transactions for many years.” For you wonky types, Lehman was accounting for these “Repo 105” transactions based on guidance from Statement on Financial Reporting Standard 140, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.

E&Y’s “team had a number of additional conversations with Lehman about Repo 105 over the years,” although they were not involved with drafting the policy nor did the firm provide any advisory services related to the transactions. According to the lead partner on the engagement, the firm simply “bec[a]me comfortable with the Policy for purposes of auditing financial statements.”

The problem, according to the Examiner’s report is that E&Y was okay with the treatment based on the theory:

Ernst & Young’s view, however, was not based upon an analysis of whether actual Repo 105 transactions complied with SFAS 140. Rather, Ernst & Young’s review of Lehman’s Repo 105 Accounting Policy was purely “theoretical.” In other words, Ernst & Young solely assessed Lehman’s understanding of the requirements of SFAS 140 in the abstract and as reflected in its Accounting Policy; Ernst & Young did not opine on the propriety of the transactions as a balance sheet management tool.

According to Lehman’s Global Financial Controller Martin Kelly, “Ernst & Young ‘was comfortable with the treatment under GAAP for the same reasons that Lehman was comfortable.'” Don’t you love it when things work out like that?

Ernst & Young has issued a statement that simply addresses the final audit that the firm performed: “Our last audit of the company was for the fiscal year ending Nov. 30, 2007. Our opinion indicated that Lehman’s financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view.”

SO! E&Y is in a bit of a pickle. Civil suits have already been filed against both firms and more investigations will certainly be coming. If you’ve got some time over the weekend, take a flip through this beauty. We know there is accounting porn in there for some of you.

Report Details How Lehman Hid Its Woes as It Collapsed [NYT]
Examiner: Lehman Torpedoed Lehman [WSJ]
Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report [Jenner & Block]

Accounting News Roundup: Lehman Failure Was a Team Effort; Boston Provident Ex-CFO Faces Prison After Guilty Plea; Who Wants to Watch a Toxic Asset Die? | 03.12.10

JPMorgan, Citigroup Helped Cause Lehman Collapse, Report Says [Bloomberg]
There’s so much blame to go around: Dick Fuld! Every Lehman CFO that ever worked there! JP Morgan, Citi, Ernst & Young (who we’ll get to shortly), you’re all at fault too! But mostly Dick Fuld. He was putting lots of pressure on Lehman’s balance sheet magicians to reduce the bank’s debt. The report states that Fuld was “at least grossly negligent” and if it gets worse than that, you’ll certainly hear about it.

According to the Bankruptcy Examiner’s report, there was plenty of parties that didn’t help matters. JP Morgan and Citi were demanding more collateral from Lehman as the firm tried to stave off death while E&Y sat back as LEH got all hocus-pocus with their accounting. So pick a company or person you don’t like and point the finger. It sounds like an argument can be made.

All this amounts to largest bankruptcy in history and boy will it sell a helluva lot of books, movie tickets, and HBO subscriptions. Silver lining!


Trader faces up to 6 1/2 years in prison [Bloomberg via Boston Globe]
Former Boston Provident CFO Ezra Levy pleaded guilty to securities and wire fraud after being accused of stealing $3 million from New York-based Boston Provident Partners, LP. Levy told the judge that he used the money to pay ‘personal expenses’ although no word on what the loot was. Presumably not a fleet of limos.

We Bought A Toxic Asset; You Can Watch It Die [NPR]
Ever dreamed of owning just a small piece of a toxic asset just watch the slow, agonizing death? Of course! Some reporters at NPR chipped in to invest $1,000 in a bond with over 2,000 bad, really bad mortgages all for the sake of journalistic interest. If the team somehow manages to make money it’s going to charity.

PwC Basically Says That the Lehman Brothers Bankruptcy is a Trainwreck

trainwreck.jpgIf you find yourself out of work but are willing to endure several sleepless nights across the pond, PwC in the UK may need some help with the administration of Lehman Brothers.
More, after the jump


Reuters, via NYT:

PriceWaterhouseCoopers, which is working with over 100 companies, mostly in the UK but also in continental Europe, said on Sunday: “We’re dealing with a large number of entities and therefore the claims could be as much as $100 billion.
“These claims are exceptionally complex and we anticipate a large amount of further work in dealing with (them).”
A significant amount of the claims arose as a result of guarantees issued by the parent company to its subsidiaries, the administrator said.
PwC said it had worked with administrators in other affiliates to understand Lehman’s accounting system so a standard approach to the reconciliation of inter company balances could be agreed.
“If this can be achieved then it should reduce the likelihood of affiliates suing each other in pursuit of amounts that are owed between the different Lehman estates,” it added.

Not sure what kind of expectations Lehman’s creditors have but we’d encourage a cynical outlook.
Lehman Claims Could Reach $100 Billion: PwC [Reuters via NYT]
Lehman Bankruptcy Won’t Be Pretty [JDA]

eBay Beats the Numbers Thanks to Lehman Schwag

ebay.pngAt least that’s what we’re guessing.
Bloomberg:
“EBay Inc., owner of the most visited U.S. e-commerce Web site, reported second-quarter profit that beat analysts’ estimates, a sign that Chief Executive Officer John Donahoe’s turnaround efforts are working.”
Whatevs. We’d argue beauties like this are the reason for the good Q.
EBay Profit Beats Estimates in Sign That Turnaround Is Working [Bloomberg]

Lehman Working to Pay Off Debt, One Tchotchke at a Time

lehman tote.jpgIn a couple months it will be at the one year anniversary of the collapse Lehman Brothers. In order to catch you up on the firm’s progess in paying off the $250 billion in debt owed to creditors, we proudly present The Lehman Store, courtesy of eBay.
So far the Lehman Store has 100% positive feedback with comments such as: “Great Lehman tie and excellent delivery time.” and “A+ SELLER”.
Lehman couldn’t be more pleased, “‘We are really excited to be able to offer this to the public because there is a demand,’ said Lehman spokeswoman Kimberly Macleod in a telephone interview.”
There is a demand“, people. And since there are currently 66 items on the auction block, you’d better get on this, PRONTO.
Lehman Holds EBay Garage Sale, Hawking Trinkets to Pay Off Debt [Bloomberg]