It’s time once again to look back at the year just past in the hope that, perhaps, this will illuminate what we can expect of the future. As we did for the stories we published in the fourth quarter of 2009, we at CFO Innovation looked at which articles and white papers found particular resonance with you, our 19,000 or so readers, in the course of 2010.
Why? As we wrote last January: “It is useful . . . to be aware of what your peers as a group are thinking about and where they are focusing their energies. If everyone is focusing on risk management, say, and you are not, you may be putting your company at a competitive disadvantage. And you may find yourself being left behind as your peers acquire new insights and knowledge.”
Death Knell?
It is not surprising that among the most well read articles are those dealing with potential seismic changes involving the accounting profession. The single most read article posed the question:
Will Ernst & Young Survive the Lehman Scandal? Published in March, the story delved into Ernst & Young’s role in the fall of Lehman Brothers, which caused the global financial system to seize up in 2008, and whether it could mean the decimation of the Big Four into the Big Three.
We analysed the
2,200-page report released on March 11 by Anton R. Valukas, the U.S. examiner tasked by the Bankruptcy Court of the Southern District of New York to investigate Lehman’s bankruptcy. He found ‘colorable claims’ against Lehman’s CEO, three CFOs and Ernst & Young, Lehman’s external auditor.
“Ernst & Young took no steps to question or challenge the non-disclosure by Lehman of its use of $50 billion of temporary, off-balance sheet transactions [to allegedly manipulate the balance sheet],” he wrote. “Colorable claims exist that Ernst & Young did not meet professional standards, both in investigating [allegations by a Lehman executive about the supposed manipulation] and in connection with its audit and review of Lehman’s financial statements.”
The legal term ‘colorable claim’ means that the examiner “has found that there is sufficient credible evidence to support a finding by a trier of fact,” Valukas explained. “Whether claims are in fact valid will be for the triers of fact to whom claims are presented.”
Those triers of facts are now considering Valukas’s findings. Judge Lewis Kaplan of the U.S. District Court for the Southern District of New York is hearing a class-action suit by Lehman shareholders that was amended to include Ernst & Young as defendant in May. The same judge is also presiding over a suit brought by the state of New Jersey and the U.S. Department of Treasury against the actors that Valukas said had colourable claims against them.
In the UK, the Accountancy and Actuarial Discipline Board launched a probe in October of Ernst & Young’s conduct in relation to the preparation of a report to the Financial Services Authority “in respect of Lehman Brothers International (Europe)’s compliance with the FSA’s Client Asset Rules for the year ended 30th November 2007.”
On December 21, Andrew Cuomo, in his last act as New York State Attorney General before assuming the office of New York Governor,
sued Ernst & Young for alleged accounting fraud. For more than seven years, Cuomo charged, Lehman had conducted what it terms ‘Repo 105’ transactions designed to temporarily park fixed-income securities with European banks in order to reduce the amount of leverage on Lehman’s books.
“This practice was a house-of-cards business model designed to hide billions in liabilities in the years before Lehman collapsed,” the attorney general alleged. “Just as troubling, a global accounting firm, tasked with auditing Lehman’s financial statements, helped hide this crucial information from the investing public. Our lawsuit seeks to recover the fees collected by Ernst & Young while it was supposed to be using accountable, honest measures to protect the public.”
Will these various triers of fact ring the death knell for Ernst & Young? We doubt it, but perhaps the answer to the popular
CFO Innovation February article,
Metrics: Who’s the Biggest Accounting Firm?, will be different in 2011. Ernst & Young, which had billings of US$23 billion in 2009 to become the world’s third biggest accounting firm, may see revenues trimmed because of its various legal and regulatory problems.
2012, May 22 
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