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Ernst & Young Excused from Blame by Arbitration Panel in Collapse of Lehman Brothers

Monday, August, 18, 2014


Nearly six years after the investment firm Lehman Brothers collapsed during the first onslaught of the global economic crisis, the accounting firm Ernst & Young, which audited the investment firm’s books, has been cleared of accusation of malpractice by an arbitration panel still sifting through the complicated ashes of the former financial giant.

 

The panel, comprised of three former judges, found that Ernst & Young was not responsible for the unusual accounting practice that allowed Lehman Brothers to remove billions in debt from its balance sheet for a short time at the end of every quarter, essentially allowing the firm to hide its distressing finances from investors.  The panel ruled that it was Lehman’s management and not the accountants who should be held responsible for the decision.

 

The ruling should have an impact on the lawsuit filed by the New York Attorney General’s office in 2010 against Ernst & Young which accuses the accounting firm of being complicit in the accounting fraud that hid Lehman’s finances from investors in the months before it collapsed completely in September 2008.  The ruling may also spur a reexamination of a decision by the Securities and Exchange Commission not to hold Lehman’s management to blame for the accounting maneuvers employed.

 

The decision not to pursue legal action against Lehman’s management team at the time was regarded as a failure of government to enforce the law, but the excuse was that Ernst & Young, as the accountants of record, were to blame.  The new arbitration ruling complicates that narrative.