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The Beginning Of The End For Ernst & Young? Auditor Back In Spotlight As Lehman Creditors Seek Probe
With the spate of corruption news out of Wall Street and seismic updates out of Iceland dominating headlines in the past month, everybody forgot about the culprit in the Lehman Repo 105 fraud. Well, almost everybody - the Lehman unsecured creditor committee, or basically the post reorganized equity estate, has decided to seek a probe of Ernst & Young to see "if the estate may
have causes of action against the auditor arising out of Lehman's use
of a the controversial accounting technique, Repo 105" reports Reuters.
In court papers filed on Monday, a group of "It When contacted, Ernst & Young declined to comment on the filing.
According to the UCC filing, the relevant hearing will be held on May 12 at 10am, at which point should Judge Peck decide to go ahead with the UCC request, the fate of E&Y could well be sealed. As we pointed out yesterday, banks continue to pursue EOQ window dressing with or without Repo 105 type deals. While we could easily check, we wonder rhetorically of the Primary Dealers how many are currently audited by E&Y. And of these, has E&Y made a point to disclose that the public will no longer tolerate the types of disclosure games that will see Dick Fuld, Tim Geithner, and many others in Congress today at 11 am, to discuss the legality of such practices? The specific nature of the UCC's request as disclosed in the filing: According to the Examiner’s Report, Ernst & Young was privy to information regarding LBHI’s and its affiliates’ use of a form of off-balance sheet financing, known within LBHI and affiliates as “Repo 105” transactions, which had the effect of temporarily removing securities inventory from LBHI’s balance sheet. According to the Examiner’s Report, the use of this form of off-balance sheet financing allowed and contributed to a material misstatement of LBHI’s consolidated net leverage levels in LBHI’s public disclosures. The Examiner’s Report indicates that LBHI did not disclose in its consolidated financial statements its entry into Repo 105 transactions and further indicates that LBHI made public filings which misleadingly indicated that such transactions had not occurred. The Examiner’s report also indicates that neither LBHI’s officers nor Ernst & Young disclosed the use of Repo 105 transactions to LBHI’s board of directors, particularly during those portions of 2007 and 2008 when the total value of Repo 105 transactions increased substantially. We can't wait to see if Arthur Anderson v2 is about to begin its slow motion unraveling. Then again, in a system which endorses frau, mark to myth, and book fudging, who are we kidding.
unsecured creditors asked the bankruptcy court to order that Ernst
& Young produce certain documents and its employees and partners
submit to an oral examination.
is unlikely that Ernst & Young will voluntarily provide this
information to the committee," the unsecured creditors said.
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Big 4 = dens of thieves
+1
I was a internal auditor at 2 NYSE-listed companies for 14 years. I had to deal with these yahoos. It's a protection racket. The partners at these firms collect massive salaries and bonuses. They hire pimply-faced barely out-of-college kids and send them green into the field. Recipe for disaster if you are a concerned investor. And let's not forget that, just like the ratings agencies, the company pays the "independent" audit. Yeah, yeah, BOD hires them, but the BOD is in bed with senior management.
What some kid that just left school with a CPA isn't going to be able to give complete assurance that some guys that have been gaming the system for 30 years with 15 layers of shell companies arent doing anything potentially fraudulent... and if they did find it, that the finding wouldn't get wiped before it actually hit the books?
never.....
Between Lehman and GS, Madoff will look like a boy scout.
Not really. When you do it, allocate the numbers on a pro rata basis by individual trader, Madoff is still a world class jag off.
The audit is not a useful source of information if 1) the client firm is extremely large and 2) the oligopoly (big 4) audits it. That is, if an audit is systemically important, the report is useless.
"We cant stop here. This is bat country"
Again, please to note E&Y's recent performance as a bank auditor in other countries as well. I know, I know, it's only €7.5 billion.
The "market" is a myth.
None of this means anything until the indictments are handed out.
Goodbye E&Y.
Mustn't forget that what CPAs render is an "opinion". And like assholes, they all have one.
They way E & Y wrote the report on the Industrial and Commercial Bank of China (ICBC) in 2003 shows just what whores they are (IMO).
Their first audit draft showed bad loans at nearly a trillion USD until Beijing instructed them to lower it to about USD 370 billion....which they did.....and next year they wrote that ICBC "has made long strides in enhancing transparency". Yeah right, you whores!
http://www.guardian.co.uk/world/2006/nov/02/businesscomment.china
The "Big Four" business model is broken - has been for many years. The field auditors who do most of the work and have most of the interaction with executive management & the real workers at the companies (BTW, the real workers usually know the shenanigans within the books) - have the least amount of experience. Many times interns (jr in college) are working on these engagements.
Audit partners are back in the office reading the WSJ while sitting on the can for an half hour, having lunch with clients and going to sporting events.
Here is the problem. Most accounting grads today (and for the past ten years or so) never worked in high school or college, and therefore, have no idea about business cycles in the real world. There are many Big Four CPA/Auditors who have no idea about how the purchasing cycle - purchase orders, invoices and recevers work through the cycle.
So how in the world would these auditors know about complex derivatives - RMBS, CMBS, SIVs & CDOs and other transactions? They simply dont.
How did WorldCom happen - I saw AA's audit workpapers. AA simply relied on the internal controls (which there weren't any at WC) to ensure the proper reporting of financial statements.
These firms are complacent and have a continued and sustained lack of employing sufficient professional skepticism as required to be an auditor - many, if not most, do not have a knowledge base or skills sets to employ an effective level of skepticism.
And finally, as pointed out above, they are not independent auditors if the BOD has the discretion to hire, fire and help set audit fees.
Want to talk about the PCAOB? Mostly ex-"Big Four" auditors....................Talk about letting the fox in the hen house.