Giant Accounting Firm Charged With Fraud

Debating Ernst & Young's role in the financial crisis

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A major accounting firm will, for the first time, face scrutiny from regulators regarding its role in the financial crisis, The Wall Street Journal reports. New York Attorney General Andrew Cuomo is preparing to file a civil lawsuit against Ernst & Young claiming that the accounting firm--while pocketing around $100 million in auditing fees from Lehman Brothers between 2001 through 2008--approved of accounting tricks that misled investors about the risks Lehman was taking prior to its collapse in September 2008.

Do the charges pack enough of a punch? And will they precipitate additional crisis-related prosecutions?

  • Why Civil Charges Instead of Criminal Charges? asks Greta Van Susteren at Gretawire: "Thousands lost money (including life savings and retirement) from the collapse of Lehman Brothers," Van Susteren asserts. Yet while people convicted of criminal fraud charges go to prison, those convicted of civil charges "simply pony up some cash" and "are left with a pile of cash so it doesn't hurt." She continues, "Do you think [Cuomo] would go after YOU in a civil action or criminal if he thought you committed fraud of only five hundred dollars? Why does the 'little guy' get treated differently?"
  • This Could Strengthen Criminal Case Against Dick Fuld, claims Yves Smith at Naked Capitalism, in reference to Lehman's former CEO: "The buck is supposed to stop with the CEO, particularly when they are paid as many bucks as Fuld received. Given the scale of looting that took place in the runup to and after the crisis, there is no hope of getting the banking industry back in its proper role of supporting the real economy until we see some senior bank executives in orange jumpsuits."
  • We May See More Prosecutions, notes The New York Times' Dealbook. New York prosecutors appear to be taking cues from a report issued by an examiner appointed by the court in charge of Lehman's bankruptcy proceedings, which suggested Lehman executives and Ernst & Young shouldered much of the responsibility for the investment bank's collapse, Dealbook explains. If this is true, then Cuomo's investigation may bring further charges against former Lehman executives and others.
  • I Don't Think We Will, states Felix Salmon at Reuters. Cuomo, New York's governor-elect, may be filing this lawsuit now because he fears that if he doesn't do anything before he heads to Albany, federal prosecutors won't pursue Ernst & Young and the accounting firm will evade punishment for the role it played in Lehman's downfall. Even if Ernst & Young loses the civil lawsuit, Salmon adds, it is unlikely to face the type of criminal charges the accounting firm Arthur Andersen confronted earlier in the decade for its auditing of Enron, and without Cuomo "the number of crisis-related fraud charges is likely to dwindle sharply."
  • This Case Is About Conflict of Interest, argues Dave Schuler at The Glittering Eye: "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 ... The purpose of the audit is to instill confidence in the veracity of publicly held companies' financial statements. It ain’t working."
  • And That Conflict May Give Rise to a New Agency, adds Dawn Kawamoto at Daily Finance. The lawsuit may "add fuel to the debate of whether an independent government agency should be created to generate Corporate America's financial reports, rather than leaving it up to company executives who, in essence, write their own report cards."
This article is from the archive of our partner The Wire.