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.