By Emmanuel Olaoye, Complinet
Civil fraud charges against Ernst & Young LLP have raised the question of whether accounting standards have become so specific that institutions view them as obstacles to maneuver around rather than guidelines for accurate reporting. Legal and accounting experts said that the suit filed by Andrew Cuomo, New York attorney general, was likely to mean the end for transactions such as the “Repo 105″ device at the center of the controversy, particularly if it led to a settlement. It could break new ground in the liability of accounting firms, they added.
The lawsuit has accused E&Y with improperly allowing Lehman Brothers to use a complex accounting transaction known as “Repo 105″ to reduce the apparent debt level of the failed investment bank, giving investors the impression that it had a lower level of debt than it actually did. The lawsuit has claimed that E&Y knew Lehman was treating the transfer of billions of dollars of securities in “Repo 105″ transactions as asset sales rather than loans. “Repo 105″ is the name of the accounting transactions that Lehman used to classify its short-term borrowings as sales. Lehman collapsed in September 2008, at the height of the global financial crisis.
“If there is a settlement this type of transaction would not be used again. The ‘Repo 105′ is radioactive. I don’t think accounting firms will be allowing their clients to use them again,” said Howard Schilit, founder and chief executive of the Financial Shenanigans Detection Group LLC.
Schilit told Complinet that the accounting standards for repurchase agreements such as ‘Repo 105′ were written clumsily and Lehman was easily able to find loopholes. “This is a case to show that if rules were written as they should have been then nobody would have attempted to misinterpret them,” Schilit said.
The Cuomo lawsuit was notable because it focused on the role of the accounting firm and not the role of Lehman executives, said Peter Henning, professor of law at Wayne State University. It raised questions about whether accountants were liable if a financial institution failed to disclose accurately an accounting transaction to investor, he said. “The fact that Cuomo is going after accountants first raises questions. What is the responsibility of the accountant in this? Accountants will always say we are not responsible for financial statements,” Henning told Complinet.
