As companies return to growth, new risks related to fraud and corruption

Two weeks before the New York office, Attorney General Andrew Cuomo has sued Ernst & Young LLP, a leading U.S. consulting firm issued a press release promoting its ability to help others manage the risk of fraud.

"As companies return to growth, new risks related to fraud and corruption, making the line at the forefront of the board of directors, audit committees and senior management of global enterprises," said company .

"Dealing with complex issues of fraud, regulatory compliance and business disputes can detract from efforts to achieve the potential of your business. Better management of fraud risk and compliance exposure is a critical business priority. - regardless of industry sector "

Talk about chutzpah. The company that wrote it was none other than Ernst & Young, the auditor for a long time away from Lehman Brothers Holdings Inc., which went bankrupt in 2008 while sport financial statements had little evidence of the catastrophe to come. Of course, E & Y may have much experience in this field. Much of it, however, is the wrong guy.

In his civil suit this week, Cuomo's office alleged that E & Y Lehman helped to participate in a massive accounting fraud - and fraud is committed in the process. The surprise was not factual claims demand, many of which are contained in a March report by Lehman's bankruptcy examiner, Anton Valukas. The allegations of misconduct in E & Y have become a routine part of business of the company have come to expect.

Great news

By contrast, the big news was that nobody brought the case at all, and was attorney general from New York that made him instead of the Securities and Exchange Commission. Finally, it is a sign of a team at the epicenter of the collapse of Lehman could be held liable. Still, it's more than a little strange that the defendants in suit Cuomo does not include anyone who worked for Lehman, or any of the E & Y accountants responsible for auditing the books of the securities firm.

E & Y had been established as a repeat offender long before Governor-elect Cuomo, filed its lawsuit. In recent years we have seen four former E & Y partners sentenced to prison for selling illegal tax shelters, while other partners have been penalized by the SEC for the blessing of fraudulent financial statements in a variety of companies, including Cendant Corp. and Bally Total Fitness Holding Corp..

For Bally, E & Y last year paid a fine of $ 8.5 million, without admitting or denying the SEC claims, professional misconduct. The SEC has also imposed sanctions against Ernst & Young on three occasions since 2004 for violation of its rules of auditor independence.

However, it seems that someone can do little to prevent E & Y on the straight and narrow. Killing of E & Y or any of the other big four accounting firms - PricewaterhouseCoopers LLP, Deloitte & Touche LLP and KPMG LLP - would leave only three surviving great, when the industry has very few competitors now.

Down

We can not have another company like Arthur Andersen was down after his indictment in 2002, conventional wisdom goes. And so these companies are allowed to plod along, fending off a slider after another, knowing that he will carry out no matter how much they offend the public sense of decency.

The last case against E & Y is derived from the use of Lehman's operations Repo investment bank called 105. Lehman use these agreements to move as much as $ 50 billion off its balance sheet values in a quarter and temporarily reduce its debt reported, usually about a week at a time. Lehman has assets of their books for the treatment of transactions as sales rather than financings for accounting purposes. This let Lehman show lower levels of leverage, according to the report Valukas.

No change

That E & Y has not changed as is clear from the press release issued this week in response to demand from Cuomo. "There is no factual or legal basis for a claim against an auditor is in this context that the accounting for the underlying transaction is in conformity with generally accepted accounting principles," the company said.

That is not an accurate description of the claims brought Cuomo, however. Cuomo suit unequivocally took the position that Lehman violated GAAP. What's more, it is not credible to E & Y to say that Lehman did not. (A spokesman for Ernst & Young, Charles Perkins, said "I can not comment beyond our state.")

In the notes to its audited financial statements, Lehman said it represented all repos as financing. This was false, since Lehman Repo 105 accounted for its sales transactions, a point on the Valukas report in detail the comprehensive review.

Back to Class

As any first year accounting major I can tell, is a violation of GAAP a company to tell investors that you are using a type of accounting treatment, when in fact any other, especially when the method is used makes its secret balance look stronger. However, E & Y continues to stress that followed Lehman rules. It's hard to say which is more insane: The notion that heads of E & Y's may believe his own spin, or I think anyone else will.

It is indisputable that E & Y's financial district Lehman blessed statements after quarter, year after year, falsehoods and everything. What the state would have to prove that your suit is that the actions of the company amounted to fraud.

For now, E & Y is saying he looked forward to presenting the facts in a court of law. If there is expected to prevail, must come with a more credible defense that nonsense is touting now.