E&Y defends Lehman Brothers audit

24 March 2010

Ernst&Young (E&Y), auditor of failed bank Lehman Brothers, has launched a defence of its accounting practices in a letter distributed among clients.

The firm was responding to allegations in a report by Anton Valukas, US bankruptcy examiner, accusing it of poor practice which disguised the full extent of the bank’s financial difficulties.

Mr Valukas’ report, which is more than 2,000 pages long and took a year to compile, claimed that “accounting gimmick” Repo 105 was used by the bank and E&Y to move assets to other financial institutions for a short period to shore up its balance sheet at the end of each quarter.

Up to $50 billion worth of investments is thought to have been hidden from regulators, the report claimed.

However, E&Y explained that the use of Repo 105 was common practice among financial institutions.

“All investment banks used repo transactions extensively to fund their operations on a daily basis; these banks all operated in a high-risk, high-leverage business model. Most repo transactions are accounted for as financings.”

In the letter, E&Y continued: “Lehman's bankruptcy was the result of a series of unprecedented adverse events in the financial markets. [Its] bankruptcy was caused by a collapse in its liquidity, which was, in turn, caused by declining asset values and loss of market confidence in Lehman.

“It was not caused by accounting issues or disclosure issues."

The auditing firm also said that the collapse of Lehman Brothers in September 2008 prevented it from investigating claims of accounting irregularities made by Matthew Lee, senior vice-president at the firm.

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