The pressure on accounting firm Ernst & Young continues to grow as an oversight board, created under the Sarbanes-Oxley accounting reform act of 1992, launches an investigation into the firm’s role in Lehman Brothers’ bankruptcy.
The Public Company Accounting Oversight Board, which can investigate and discipline public accounting firms, has launched an inquiry into Ernst & Young following a bankruptcy examiner’s report that accused the firm of “professional malpractice” in its approval of a controversial accounting technique used by Lehman as it slid into insolvency. The technique known as Repo 105 helped mask the deteriorating nature of Lehman’s balance sheet.
The oversight’s board inquiry is yet the latest investigation to hit Ernst & Young over its role as Lehman’s auditor, which was highlighted in the report issued by Lehman bankruptcy examiner Anton Valukas last month. As reported by FOX Business, the Securities and Exchange Commission, as well as UK regulators, are looking at the accounting giant’s activities.
Charles Perkins, a spokesman for Ernst & Young, has vehemently denied that the firm has done anything wrong. He didn’t return calls for comment. A spokeswoman for the oversight board had no comment.
The oversight board’s investigation has been described as being in its preliminary phases, launched just after the bankruptcy examiner’s report was made public, when the enforcement division of the outfit notified the larger board of its interest, according to a person with knowledge of the investigation.
The board’s investigations are confidential, a spokeswoman said, but its findings of wrongdoing aren’t. Since the board gained enforcement authority following the passage of the Sarbanes-Oxley law, which was designed to reform accounting practices after the collapse of Enron, it has brought about two dozen cases.
If, however, it decides to bring a case against Ernst & Young over its role in the Lehman implosion it would clearly be the most high-profile enforcement action since it began bringing cases in 2005.
The bankruptcy examiner’s report will certainly be the board’s road map, according to people with knowledge of the matter. The report said there could be claims brought against Ernst & Young for not providing disclosure about Lehman’s use of Repo 105, or for failing to full determine whether the accounting gimmick was in full compliance with US accounting rules.