Accounting Malpractices Continue Even After Reforms

New revelations about the erstwhile Lehman Brothers Holdings Inc, have shown that governmental measures to curb accountancy malpractices have failed as exemplified in this case.

The Sarbanes-Oxley Act, which was approved by Congress in 2002, was aimed towards tighter regulation and monitoring of corporate accounting. It was prompted by the anomalies uncovered in Enron Corp and WorldCom Inc, companies that later folded. But despite these measures, misleading accounting is still prevalent in the corporate world, as was revealed by a recent report by an examiner on Lehman Brothers.

The bankruptcy examiner for Lehman Brothers Holdings Inc has reported that he has uncovered some anomalies in the company’s audit conducted by Ernst & Young showing that the auditor gave preference to the client’s interest over that of the company’s investors.

Examiner Anton Valukas stated that Ernst & Young chose to remain silent about the billions of dollars worth of transactions that were conducted by Lehman to hide assets. Given this, the examiner has raised concerns about the effectiveness of the many measures that were taken post Enron to address these failings in the regulatory framework.

Interestingly, Lehman was Ernst and Young’s only Wall Street client, and the fees paid to the auditors exceeded that from their other prestigious clients like Wal-Mart. There were also many ex-Ernst and Young employees among Lehman’s top management ranks, like Christopher O’Meara who held the post of CFO at Lehman Brothers. Based on the findings of the report, O’Meara may well be personally liable to the creditors. O’Meara however denied the accusations.

Meanwhile Ernst & Young’s spokesperson Charles Perkins said that these criticisms are being viewed seriously in view of the fact that the firm had followed the highest standards of ethics in its audit of Lehman Brothers.

The erstwhile CEO of Lehman’s, Richard Fuld, who held the reins of the company until its bankruptcy in 2008 has also been targeted by examiner Valukas. He has been accused of gross negligence in allowing his company to present a misleading picture of its finances.

Considering that audited reports are completely trusted by the general public and investors, it is imperative that auditors keep investor interests before anything else including their own profit making. The Center for Audit Quality reports that most investors base their decisions on audit reports released by the companies. This was a major consideration in the government’s move to bring in measures like the Sarbanes-Oxley act to clean up the accounting systems at companies across the country.

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