Sunday, April 11, 2010
Now They Ask?
"Unlike past market meltdowns, auditors have so far escaped much of the blame in the current financial crisis. The focus on Ernst & Young LLP [E&Y] in the report released last week by the bankruptcy examiner for Lehman Brothers Holdings Inc. [LBHI] has changed that. ... In a statement Friday, a spokesman for E&Y said the firm reviewed the accounting for Lehman's Repo 105 deals 'on a number of occasions. Out view was, and continues to be, that Lehman's accounting policy for these repo transactions complied with generally accepted accounting principles. The Examiner has not concluded otherwise.' ... That has precluded the kind of in-depth bankruptcy-court examination that resulted after Lehman's collapse. This approach contrasts with the bursting of the tech-stock bubble, when the implosion of Enron Corp. and WorldCom Inc. put auditors directly on the hot seat. ... Those scandals led to the Sarbanes-Oxley Act, which changed some key ways in which accounting firms operate and are regulated. ... While E&Y maintains its audits were proper, the accounting for Lehman's Repo 105 deals appears dubious to some outside experts. 'Unless it's in "Alice in Wonderland," I've never seen this,' said Lynn Turner, former chief accountant of the [SEC]. Even if the deals are within the technical bounds of the accounting rules, experts say it appears they failed to reflect the deals' true purpose. .... These are usually accounted for as a financing arrangement akin to a loan. ... One possible proof of a lack of control is that the securities being exchanged are worth far more than the cash being received. ... Guidance in the accounting rules suggests that an exchange of securities in excess of 102% of the cash value would show a lack of control. ... And Lehman should have had some reason for the 105% level, said Jack Ciesielski, editor of the Analysts's Accounting Observer. ... The problem, accounting experts said, is that in an accounting treatment isn't allowed for a US parent company, transferring a deal to an overseas subsidiary isn't likely to pass muster", my emphasis, David Reilly at the WSJ, 15 March 2010: http://online.wsj.com/article/SB10001424052748703457104575121920770049774.html.
Another Big 87654 disgrace. Had E&Y ever heard of substance over form? The Repo 105 deals were clearly financings. What did E&Y think motivated Repo 105? Answer: end run the 102% rule! E&Y must be full of craven idiots? What should we expect from E&Y which sanctioned the '.001 standard", in another context? See my 20 March 2010 post: http://skepticaltexascpa.blogspot.com/2010/03/lehmans-fiddles.html.