Best of the Blogs: The Ernst & Young Case
It’s not really my area, but I’ve been especially interested this week in reading about the new civil fraud case brought by the State of New York against Ernst & Young. The case arises from E&Y’s auditing work for Lehman Brothers, an early and important casualty of the financial crisis. In this post, Matt Taibbi explains the basics of the Repo 105 transactions that Lehman used to hide its precarious financial position. E&Y is now in trouble for signing off on Lehman’s questionable accounting statements.
For some helpful commentary on E&Y’s expected defense, see this post by Caleb Newquist at Going Concern. In essence, E&Y’s position seems to be that it cannot be held liable under the New York law because it was Lehman, not E&Y, that produced the misleading financial statements and that used the statements to sell billions of dollars of securities before the collapse. Apparently, there is no precedent under the state law for the prosecution of an accounting firm based on its role as an auditor, so the courts may have to wrestle with some difficult questions in the case.
What particularly interests me about the case is the way it echoes the prosecution of Arthur Anderson, which destroyed the venerable accounting firm as a result of its role in the Enron collapse.