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Beginning Of End For E&Y? Cuomo Files Civil Fraud Case Against Repo 105 Auditor
As we discussed in detail in March it would be only a matter of time before the AG would file some sort of suit against E&Y for the firm's involvement in Lehman's Repo 105 end of quarter window dressing violations. And as we reported yesterday, Andrew Cuomo has now officially filed civil fraud charges against Ernst & Young. While overdue following Anton Valukas' "examiner Lehman" report which obliterated all integrity E&Y may have had, and while we are confident there will be a settlement in this case as well, at least this final act by Cuomo as NY AG pretends to give the impression that the US judicial system is not completely corrupt.
From Reuters:
Accounting firm Ernst & Young was sued by New York regulators on Tuesday, accused of helping to hide financial risks at Lehman Brothers Holdings Inc before the Wall Street firm's 2008 collapse.
The civil fraud case was filed by New York Attorney General Andrew Cuomo, a statement from his office said.
Ernst & Young was Lehman's outside auditor from 2001 until the investment bank filed for bankruptcy in September 2008.
And while we look for the actual filing, here is Bloomberg with some more information:
'Technically’ Complied
In his report, Valukas said Ernst & Young tried to make sure Lehman’s accounting for Repo 105 complied with generally accepted accounting practices in the U.S. at the time. The firm may have been negligent even if Repo 105 trades “technically” complied with U.S. rules, he said.
He faulted the firm because it didn’t audit individual Repo 105 trades, “did not evaluate the possibility that Repo 105 transactions were accounting-motivated transactions that lacked a business purpose,” and didn’t take a stand on whether Lehman’s extensive use of the device was “material” and should be reported.
“Financial statements may be materially misleading even when they do not violate GAAP,” he wrote in his report.
Ernst & Young was told by a whistleblower at Lehman that Lehman was using the device extensively, and didn’t tell the investment bank’s audit committee about it, Valukas said.
‘Another Drug’
The investment bank, which had been using the repos since 2001, stepped up their use in mid-2007, breaching internal limits, the Valukas report shows. Lehman’s former president, Herbert “Bart” McDade, commented on them in an April 2008 e- mail exchange, after he was asked whether he knew about their effect on the balance sheet, Valukas said. “I am very aware,” McDade wrote back. “It is another drug we’re on.”
The U.K. accounting regulator, the Financial Reporting Council, said earlier this year it was investigating Ernst & Young’s auditing of Repo 105 transactions. The deals helped Lehman downplay its leverage in late 2007 and 2008 by temporarily moving assets off the firm’s balance sheet, Valukas said.
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and then there were three...( the big three)
...until the next one...
What comes after NO reliable accounting firms?
After?
There haven't been reliable accounting firms since the 60s. The entire model of Big 8 fees is ridiculous.
These people get paid by the very people they supposedly audit. How in hell is that supposed to produce independence.
And what on earth should entitle the current and retired partners to millions of dollars for doing nothing?
Having worked for one for 5 years, and witnessing first hand the level of outright corruption, the way the partners and managers allow their clients to book the budget over the material findings by the auditors down the line, I can tell you that the CPA firms of most companies are one of the biggest scams in regulatory history.
The disappearance of all four firms and the consequent reduction to nothing more for the retired partners would be a good start to reform.
Sarbanes-Oxley has made even more money for the partners who pull down million dollar salaries for doing next to nothing.
The 'billable hour' for all "professions" has turned into an entitlement a hell of a lot more enriching than welfare. But that's all it is welfare, mandated by the government for the well-off.
There isn't a partner anywhere at anytime worth more than one year's salary at retirement, and the ones still working shouldn't be paid more than a bit above minimum wages for all that they contribute to providing accurate information to the stockholders of public companies.
Still big 4. This is merely civil. You know what that means? A slap on the wrist and a few printed $ will make it go away.
Doubtful, there would only be 3 left than. Big fine, a few partners leave and business returns to normal.
Given that D&T was over at Bear and PWC at AIG and KPMG was over at Countrywide every firm was involved in one of the major players of the financial crisis.
The government has been protecting the Big 4 since Andersen came apart because the fictional audited financial statements give the appearance of a once functioning financial system.
Revoke the LLC/LLP status and return things to a general partnership and watch audits become serious again. Right now they are just pretend work for pretty people. Until a partner in Philadelphia is worried about what the office in NYC is up to again, the firms will continue to rubber stamp fictional numbers and collect fees.
Truth.
gov is a tool (in every sense of the wood) of the top .005 of the population. Societies always mature to this end.
Maybe, but just in case, I presume you have voted in all recent elections and made sure your Congressional and local representatives know your views?
Brings up a good point, where are the investigations into the other TBTFs as to whether they were perpetuating the same 105 repo fraud.
Now reach through with shackles to the Execs that drove or approved them ... then we'll be getting somewhere.
Obama implicitly pardoned them by saying what they did was legal on Jay Leno over a year and a half ago.
Can't remember if that was before or after he abrogated contract law in the GM debacle. ?
Before, it was one of the first acts of his Presidency. Jay Leno appearance where he declared the shenanigans of the financial crisis legal.
Fitting he did it on a show of a comedian that isn't really funny.
Thank you for the phrase "pretends to give the impression..."
ZH becomes more important each day.
tisk, tisk, a slap on the wrist. Now pay us our pittance settlement and find a new way to conceal liabilities outside of the balance sheet and defraud investors. It's all about destroying transparency in the USSA!
Isn't it already clear that the entire politcal/economic system is corrupt from the top to the bottom?
This cannot continue indefinitely, and it won't.
Cash out all paper wealth, buy gold and wait for the reset.
It can continue as long as the semi-trucks deliver food for the masses.
and we can buy it with our fed-paper.
Don't you mean your Comercia debit card? Fed paper is gonna be inflated away to nothingness, that way, fedgov can win the War on Drugs.
Enron.. then Lehman Brother's. If you want to implode your company, hire the best in the business "Oh Happy Day!"
I have only one thing to say here.
IF you go to "Yesterday's" story on this important matter...DO NOT watch the embedded video there if you embrace the "Y" chromosome. You will suffer irreparable brain damage. I know.
That's all I'm sayin'...
Interesting that Cuomo chose to do this during Christmas week right before he moves to the Governor's office.
The US judicial system is corrupt. Cuomo is in the bag, bought and paid for. E&Y is just a token sacrifice to calm the serfs.
Exactly, just a scapegoat for the whole mess. Fuld knew as well as many of their executives, and where are the indictments. A case against a company equals no criminal charges for individuals. Same game. Propaganda message for the masses- Cracking down on wallstreet.
Here's another example of the government allowing criminals to buy their way out of going to jail.
"Deutsche Bank AG, Germany’s largest bank, admitted criminal wrongdoing and agreed to pay $553.6 million to avoid prosecution in the U.S. over fraudulent tax shelters that generated $29 billion in “bogus” tax losses.
The U.S. Justice Department, under an agreement yesterday, won’t prosecute the Frankfurt-based bank for fraud or tax evasion for enabling wealthy U.S. citizens to avoid $5.9 billion in taxes, after the bank admitted criminal wrongdoing."
http://www.bloomberg.com/news/2010-12-21/deutsche-bank-agrees-to-pay-553...
I want to see someone charge criminally. There is nothing civil about any of this crap.
This is actually pretty complicated. Hard to put a vice on a firm that may have approved/reviewed something "technically" correct but had some other duty, I don't think so.
As with all cases like this there is and individual or individuals that participated in some kind of fraud that the regulators won't hold accountable on an individual basis.
How many bankers arrested so far?
None but the fact is the "police" of the economic system are on the take. Without the auditors and rating agencies signing off on fraud the entire fraud can't occur.
The SEC, the FDIC, the auditors, the rating agencies are all on the take. Frankly you hit the agencies that are supposed to be watching the foxes, the foxes behave a little better.
amen! I spent 7 years in public accounting 4 with big 5 including andersen and deloitte and 3 with Grant Thornton which wasn't any better, it really is a huge scam.
whoever junked me, do you know when an audit firm fires a client or issues an adverse opinion report? It's when it becomes apparent that company can no longer pay the fees. Even on the tax side the firms will do everything they can to game the system so they can charge more fees. Many services are legit but there are whole groups organized to think up ways to manipulate whatever clients need manipulated.
Not pro Lehman or pro E&Y (really don't care), but something seems wrong when the accuser says the financials "complied with" and "did not violate" GAAP, but because they were "misleading" (as defined by non-GAAP presumably), therefore you go to jail (despite an audit opinion that only claims confomity with GAAP).
There might be a problem with GAAP. Actually, certain about that. For example, there are GAAP rules that produce what many would believe to be misleading results -- hence investors frequently "undo" certain GAAP accounting to make the results more relevant. But neither GAAP nor auditors allow one the luxury of ignoring GAAP rules because you sincerely believe the accounting treatment to be misleading.
Seems under this theory, when the government tells us we did not violate the law, but what we did was "wrong" (as defined somewhere outside the law) and takes us to jail, we should buy into that logic.
We may be evolving to a point that, where there's pain, there must be criminals.
Well done. Blame the accountants for the deals. So stupid. Throw Fuld in jail, the directors that were aware of the fired whistleblower, general counsel who knows everything? No, can't do that...come here little bean counter.
Zero justice in this move. This is about money and forcing EY to cough up dough because they have some. Morons applaud like someone was punished. Sure keep on believing that....Quis custodiet ipsos custodes?
what's most disturbing about the Bloomberg story is that only 48% of these so-called blue chip executives believe that the government should pursue fraud charges against E&Y, meaning 52% seem to be ok with companies dressing up their balance sheets with bogus assets. The easiest way around this, which, of course, companies will oppose to their dying day, would be to require companies to use an average accounts methodology on balance sheets rather than end of quarter balances. That way, no end of quarter repo transactions or working capital games can be played and investors will get a truer picture of a company's balance sheet throughout the quarter/year.
Are the reported assets "bogus" if (as reported above) the accounting treatment complied with GAAP??
Maybe the primary problem is GAAP.
this is a goverance issue, not an accounting issue. Directors hire mgmt. mgmt creates polices that directors approve including ethics and business purpose of transactions. This is where the investigation should begin.
First of all, directors don't hire management. At most, directors hire the CEO, CFO and GC. For an enterprise as large and complex as Lehman, that's hardly management. The CFO and CEO signed off the financials pursuant to SarBox requirements, but, again, not sure what the relevance is. Based on the size of the Repo 105s E&Y auditors had to have known or SHOULD have known what those repo transactions consisted of and the underlying assets that would soon wind up back on Lehmans balance sheet as soon as the Repo 105 was closed.
While I'd happily blame the directors b/c they clearly were asleep at the wheel, this isn't the time.
If we're talking about policies, we should be talking about the policies at E&Y who permitted Lehman to pretty up their balance sheet with repo transactions that magically made a bunch of crappy assets appear like gold-plated treasuries (there's an oxymoron for you) for a few days until the assets were brought back onto the lehman balance sheet.
Zero chance that EY will go under from this.
This isn't a case like Arthur Andersen being willfully complicit in massive fraud.
Even if they get convicted, which is highly unlikely, they will just get fined.
Tag the Lehman executives first. And where the F were the regulators?
Down to Big 4 now, can't afford to kill off another and make it Big 3. This will be some noise, followed by some fines and some resignations / firings.
Nothing to see here, move along.
(Big 8 alumni here).