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The Financial Reporting Council has asked Ernst & Young to
explain how it audited the books of US investment bank Lehman
Brothers before it went bust in 2008, according to the British
accounting watchdog.
The FRC officials have been studying a 2,200 page report from US
examiner Anton Valukas on the collapse of Lehman.
The report, published on March 10, said there was sufficient
evidence to support a possible claim that the firm's auditor,
E&Y, had been "negligent" and that Lehman could pursue claims
against the firm for "professional malpractice".
"Following the publication of the recent report on Lehman Brothers,
the FRC is ascertaining the facts on how the 'Repo' transactions
were accounted for and audited in the UK in order to determine any
implications," the FRC says in a statement.
"To that end, we have asked Ernst & Young to provide further information in relation to what happened in the UK."
Repo 105 refers to an accounting technique - described by
Valukas as a gimmick - that helped lower the struggling bank's
apparent leverage by $US50 billion.
The repo effectively allowed Lehman to park $US50 billion of assets
and liabilities off balance sheet, lowering its reported leverage
at a critical time.
E&Y says it will cooperate fully with all relevant parties.
It said last week its last audit of Lehman was for the fiscal year ending November 30 2007 and it still believed the bank's financial statements for that year were fairly presented in accordance with US accounting rules.
Valukas said E&Y's lead partner on the Lehman audit "became comfortable" with the use of Repo 105 to lower apparent leverage.
Lehman transferred assets to its London unit, which was the only jurisdiction where the bank could get lawyers at Linklaters to sign off on the deals.
