Ernst & Young: Ignorance Of The Law Is Not A Defense

Ernst & Young, which handled the audit duties for Lehman, is trying to persuade its customers and the public that it will not suffer the same fate that Arthur Andersen did after the bankruptcy of Enron–one of its largest clients. There has been a great deal of speculation in the press that E&Y will not be able to weather a government investigation and suits from Lehman partners, counterparties, and shareholders.

At issue is that accounting for Repo 105 transactions, which have been described as close to the same as standard repurchase and resales of securities. Lehman, however, used the transfer of securities to make its balance sheet look better than it was, at least according to the examiner’s report of the demise of the bank.

Contrarian Pundit has come up with a copy of the letter E&Y has circulated as a sort of preemptive defense of its actions in the Lehman matter. The tactic may not be a good one. It draws attention to E&Y’s complex relationship with Lehman and reads as if the audit and consulting firm has something to hide.

E&Y’s defense, among others, is that the Lehman examiner did not challenge the accounting for Repo 105 transactions. That may be true, but it is hardly a substantial defense. It was not the examiner’s job to pass on either the legality, the accounting treatment,or the liability that E&Y faces. The use of the examiner as a screen will not ultimately help E&Y at all.

Douglas A. McIntyre