Taking on Ernst and Young sends a message to the rest of the auditing firms they best beware.
The Wall Street Journal reported today that Andrew Cuomo, New York’s Attorney General and Governor-elect is preparing to file suit against Ernst and Young for its role in the Lehman Brothers collapse of 2008.
In the years leading up to the financial crisis, Lehman Brothers, Bank of America, and others made a habit of systematically lowering stakes in risky, short-term debt investments known as repurchase agreements or “repos” just before the end of fiscal quarters. This allowed the financial institution to appear healthier than it actually was. If you speak Wall Street, the practice is better known as “window dressing”. This deceptive reporting tactic masks bad debt for earnings reports, but does nothing to cure the ills of a riskily managed portfolio on the brink of collapse.
The bankruptcy examiner for Lehman Brothers has found that the failed firm routinely window dressed its earnings from 2001 to 2008. In addition, Mr. Cuomo’s investigation has uncovered Ernst and Young’s approval of Lehman’s window dressing from at least 2001 to 2007.
Taking on Ernst and Young sends a message to the rest of the auditing firms they best beware. A bad judgment call or two and the lawyers will be circling like Buzzards. This growing trend of looking to facilitators of fraud comes on the heels Irving of Picard’s pursuit of JP Morgan for aiding and abetting the Madoff fraud. This trend should spark fear across Wall Street. No doubt accountants, bankers, and even lawyers must take on a more vigilant role when advising their clients. They must make sure the Board is aware of material risks and that the entire financial picture of the company is disclosed and transparent.
Mathew Lee; Another Man Worthy of Praise
The Lehman bankruptcy examiner also showed that Mathew Lee, a whistleblower at Lehman Brothers raised red flags about the repo trades in the years leading up to the collapse. Unfortunately, Mr. Lee was ignored and quickly dismissed from the firm for his rabble rousing. Mr. Lee was a Lehman Brothers vice president who complained to his direct boss and wrote letters to other Lehman executives warning of ethics code violations related to window dressing. Though he was ignored in this instance, whistleblowers like Lee are essential to properly police Wall Street and help avoid major crises like the one experienced in 2008. The whistleblower protection provisions under Dodd-Frank and the new whistleblower office to be established at the SEC will give whistleblowers like Mr. Lee an essential outlet to express concern and help regulate Wall Street.
Assisted by Zachary Kady