It seems like only yesterday that Arthur Andersen, then the largest accounting firm in the world, was found guilty of colluding with its client, Enron, in the latter’s falsification of its financial statements which Andersen, as the company’s auditor, was legally and ethically required to reveal. Now Ernst & Young, Lehman Bros. auditor, is facing civil action for its role in Lehman’s collapse:
New York prosecutors are poised to file civil fraud charges against Ernst & Young for its alleged role in the collapse of Lehman Brothers, saying the Big Four accounting firm stood by while the investment bank misled investors about its financial health, people familiar with the matter said.
State Attorney General Andrew Cuomo is close to filing the case, which would mark the first time a major accounting firm was targeted for its role in the financial crisis. The suit stems from transactions Lehman allegedly carried out to make its risk appear lower than it actually was.
Lehman Brothers was long one of Ernst & Young’s biggest clients, and the accounting firm earned approximately $100 million in fees for its auditing work from 2001 through 2008, say people familiar with the matter.
By law publicly held companies must be audited by outside auditors. As would seem obvious the auditors are paid by the companies being audited for this service. This creates an irreconcilable conflict of interests.
Once upon a time people spoke of the Big Five Accounting Firms. When the largest of these firms, Arthur Andersen, collapsed as a consequence of its criminal fraud conviction following the revelation that Enron had been cooking its books, the Big Five became the Big Four.
The purpose of the audit is to instill confidence in the veracity of publicly held companies’ financial statements. It ain’t working.