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Ernst & Young may face fraud lawsuit over Lehman audits
Ernst & Young logo on a briefcase
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Kai Ryssdal: New York State Attorney General Andrew Cuomo has about 10 days left on the job. He'll be sworn in as governor on New Year's Day. But he's not just biding his time on the way out. There are reports today that Cuomo's going to to file civil fraud against the big accounting firm Ernst and Young. The case is said to center around some creative accounting at Lehman Brothers as the financial crisis was gathering steam and whether Lehman's auditors -- the aforementioned Ernst and Young -- picked a convenient time to look the other way.
Marketplace's Alisa Roth explains.
Alisa Roth: This will be the first time a big accounting firm is charged for its actions related to the financial crisis.
Robert Mintz is a former federal prosecutor and a white collar attorney. He says the key to this case is going to be whether investors were misled by Ernst and Young's audits.
Robert Mintz: The AG is going to look at this case and decide whether investors may have made decisions about what to do with their money based upon some assurance that they got from outside auditors.
This case calls to mind what happened to Arthur Anderson after the Enron scandal. That lawsuit was eventually thrown out. But not before the accounting firm went out of business. Mintz says that probably won't happen to Ernst and Young. Especially since it's a civil case, not a criminal one.
Howard Schilit is an expert on forensic accounting. He says the case is important because it highlights the job of the outside auditors.
Howard Schilit: Prosecutors have a moral responsibility to be sure that investors in any company can feel confident that the financial reports are produced without financial trickery. So this is really not about Lehman. It's about protecting investors today.
If it's found guilty, Ernst and Young could face very big fines -- and, potentially, lawsuits from other investors.
News of the impending suit is being reported by the Wall Street Journal. Neither the attorney general's office nor Ernst and Young had returned calls by airtime.
In New York, I'm Alisa Roth for Marketplace.
It seems that Ernst & Young should have a harder time getting out of this. Andersen could argue that it was following the normal auditing procedures at that time, but post-Enron, we would hope that there are higher accounting practices, especially in light of the shady transactions that Lehman was conducting.
When are the AGs going to go after the bond rating agencies? Just like the investment banks, the bond rating agencies are still rating US debt AAA while cutting other countries 3, 4, or 5 levels at a time. Dropping a rating by 5 levels tells me that they are not doing a good job and investors are the ones being cheated.
Might want to fire your editor. The quote attributed to Howard Schilit has to wrong: "...investors in any company can feel confident that the financial reports are produced WITH financial trickery." I assume you meant WITHOUT. Fairly significant shift in the meaning of that statement, no?
