EY Agrees to Settlement of Lehman Auditing Suit

The auditor helped Lehman Brothers' balance sheet appear healthier and less risk-laden than it actually was, charged the New York attorney general.
Matthew HellerApril 16, 2015
EY Agrees to Settlement of Lehman Auditing Suit

After more than four years of litigation, Ernst & Young has agreed to pay $10 million to settle New York State allegations that its auditors helped Lehman Brothers Holdings mislead investors before the investment bank collapsed in 2008.

The case was the only one brought by a law enforcement agency over Lehman’s demise, which helped precipitate the 2008 financial crisis. The New York attorney general sued E&Y in December 2010, alleging it facilitated a “massive accounting fraud” that made Lehman’s balance sheet appear healthier and less risk-laden than it actually was.

The $10 million settlement was well short of what the attorney general had sought, but E&Y previously agreed to pay $99 million in damages to investors to resolve a class-action suit.

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“If auditors issue opinions that are unreliable or provide cover for their clients by helping to hide material information, that harms the investing public, our economy, and our country,” Attorney General Eric T. Schneiderman said in a news release. “Auditors will be held accountable when they violate the law, just as they are supposed to hold the companies they audit accountable.”

Lehman filed for bankruptcy on Sept. 15, 2008. According to the New York complaint, the alleged accounting fraud involved Lehman’s use of a mechanism known as “Repo 105” that removed tens of billions of dollars of debt from its balance sheet to make its leverage ratio appear healthier at the close of financial quarters.

“Ernst & Young approved Lehman’s accounting for the Repo 105 transactions and issued unqualified opinions certifying Lehman’s financial statements, in spite of knowing that Lehman was not disclosing the existence or impact of the Repo 105s in its annual and quarterly consolidated financial statements, all of which Ernst & Young audited or reviewed,” the New York AG said.

The case was also the first against the auditor of a public company under New York’s powerful securities fraud statute. “After many years of costly litigation, we are pleased to put this matter behind us, with no findings of wrongdoing by EY or any of its professionals,” the firm said in a statement.