Mario Christodoulou, Accountancy Age, Wednesday 16 June 2010 at 00:00:00

Disciplinary board probes "preparation and audits of the financial statementsof Lehman Brothers"

Ernst & Young faces fresh scrutiny into its audit of Lehman Brothersafter the UK?s accounting watchdog announced it would investigate the allegeduse of accounting gimmicks by the collapsed US bank.

The Accountancy & Actuarial Discipline Board (AADB) said it would probethe final years before the bank?s demise, focusing on the use of particularrepurchase transactions, known within Lehman's as Repo 105s, allegedly used todisplace assets during sensitive reporting periods.

In a statement, the AADB said it would investigate the conduct of E&Ymembers in the audit of Lehman Brothers UK arm, Lehman Brothers International(Europe). It will also investigate the treatment of Repo 105 transactions usedto shift $120bn (79.6bn) off the bank?s balance sheet in the years leading toits collapsed.

The move follows a March announcement by the Financial Reporting Council(FRC), which oversees the AADB, to ?ascertain the facts? on how repo-transactionwere audited.

The publication of US court appointed examiner Anton Valukas report in Marchfirst brought to light Lehman?s use of Repo 105 transactions, and suggestedthere may be colourable claims brought against E&Y. The firm has since beennamed as a defendant in a US amended class action.

E&Y has defended its audit throughout and said it stands by the work itdid for the bank.

Following the release of the Valukas report the US Securities and ExchangeCommission (SEC) wrote to two dozen US financial institutions seeking anexplanation of their use of similar repurchase transactions.

The US audit watchdog, the Public Company Accounting Oversight Board is alsowidely believed to be investigating the audit, despite being legally bound fromcommenting on active investigations.

A PCAOB investigation into Lehman's UK activities risks being blocked by theEU, which is trying to pressure the US into sharing confidential documentsamassed during its inspections of audit firms.

Further reading:

Lehmaninvestigation blocked by US-EU regulator stand-off

Transatlanticaudit row between regulators rages

Barnier:we?re not blocking US watchdog