Ernst & Young Faces Fraud Charges
The Wall Street Journal announced that Attorney General, Anthony Cuomo, is close to filing civil fraud charges against Ernst & Young for its alleged role in the collapse of Lehman Brothers. The lawsuit is set to allege that Ernst & Young sat idly by while Lehman Brothers, one of their largest clients, cooked its books and misled investors by removing debt from their balance sheets prior to reporting their quarterly financial results to hide true levels of risk. This accounting exercise has been dubbed “Repo 105” and involves “window dressing” whereby repo debt is systematically lowered at the ends of fiscal quarters, making the firm appear healthier than they were in actuality. Then, after the next quarter began the repo debt levels were restated to reflect the accurate risks assumed by the firm.
According to the article, Ernst & Young helped Lehman Brothers disguise their true financial condition for seven years, while collecting $150 million in fees from the firm. The Lehman Brothers situation is added to a list of major problems for the accounting giant. Ernst has paid $142.5 million to shareholders and bondholders of HealthSouth to settle an accounting scandal over the company’s overstating earnings and $100 million to settle part of a claim for overstating online ad revenue for Time Warner. The story echoes of the Enron and Arthur Andersen scandal a decade ago.