Lehman Brothers Investigation Causes a Stir

The report on an investigation into wrongdoing at Lehman Brothers before the company collapsed has caused quite a stir among regulators and the financial industry.

The comprehensive report, which was authored by Anton R. Valukas, an examiner appointed by court to investigate the company’s bankruptcy has blamed Lehman’s top management and auditor Ernst and Young of using accounting gimmicks to hide troubled assets. The most controversial was the use of an accounting trick known as Repo 105 that allowed the company to shift a massive $50 billion of toxic assets.

Industry experts and those with regulatory experience expressed their surprise at the findings. It was earlier believed that the only reason for the company’s collapse was its reckless investments and trades, which went bad primarily because of the subprime crisis. But since the report has come out, the blame is shifting to those responsible for managing the company’s accounts. This includes Dick Fuld, its chief executive before the collapse, and the past three CFOs of the company. A spokesperson for Dick Fuld claimed that the former CEO had no knowledge of any accounting fraud.

Lehman’s auditor Ernst and Young has also been criticized because it is the auditor’s duty to make sure that the firm is not indulging in any accounting malpractice. Considering that as much as $50 billion worth of assets were misrepresented, the auditing firm will find it difficult to defend that it was accurate and honest with its audit. A spokesperson from Ernst and Young however said that their audit was in line with GAAP (Generally Accepted Accounting Principles). But people involved with regulation of accounting practices said that the company’s defense sounded weak, and its audit may have been influenced by the Lehman management.

Another company that has come under the scanner is Linklaters, a British law firm, which signed off the controversial Repo 105 transactions. It has been alleged that the law firm helped Lehman carry out these transactions through its European arm. A spokesperson for Linklaters said that the firm was not involved in any wrongdoing.

With the revelation of Lehman Brothers’ accounting tricks, other Wall Street banks had to rush to issue statements that they were not involved in any such practices. But most people will find it very difficult to trust the same banks that brought us close to a complete financial disaster and probably even played a role in Lehman’s fall.


  1. there is no firm in the world that could audit that monster it’s impossible and im sure LB , hung them out to dry.

    The audit , is static the money flowing is like a river. Imagine freezing all fish in the ocean so you can count them.

    Scale is everything.

  2. Taking the global effect of the LB collapse into consideration and the unethical conduct by a world class independent auditor that for sure audits the accounts of a major portion of our world’s wealth. Nevertheless, EY should not be greedy to accept the internal audit engagement while being the external auditor of LB. If this was not the time for the Big 4 to become Big 3, then it is time for this firm to be reviewed independently in terms of all aspects of business conduct.

    Many professional issues have been raised globally other than Lehman Brothers these days, the most recent one of them is HealthSouth Corp. in which a fraud scheme of $2.7 billion has been not caught, EY is to pay $109 million to settle a lawsuit from investors (Birmingham Business Journal).

    The DIFC has ordered one of the listed companies (Damas) to select an auditor other than Ernst & Young.

    Many other cases can be seen if you turned your search engine on.

    As investors, we shall stand together to see if the people we are sharing our profits with to audit our companies well deserve the fees they are charging us or not.

  3. Ernst and Young were paid us$ 110 millions for 4 years by lehman. You do not bite the hand that feeds you. Is there loyalty to shareholders or management. It is about time shareholders should sue them for malpratice and recover their investment

Speak Your Mind