Ernst and Young Under the Gun

Cornice of old national bank, representing Deutsche Bank and whistleblowers

Ernst and Young Under the Gun

In the game of “Life,” (the Milton Bradley version, mind you) each piece of paper money bears the image of a fanciful character. One of the most memorable is that of “G.I. Luvmoney” (Art Linkletter). It seems that the spirit of old G.I. Luvmoney may have been hovering over not only failed investment bank Lehman Brothers but also its bookkeeper, Ernst and Young. A whistleblower is claiming in a blistering letter that Ernst and Young engaged in unethical accounting practices. Lehman’s response to the whistleblower? Lay him off, of course, and conveniently blame it on broader downsizing.

The whistleblower, Matthew Lee, a senior VP in Lehman’s finance division, made six major allegations of accounting fraud in a memo he sent to Lehman’s senior managers in May 2008. Lehman asked E & Y to investigate, and Lee highlighted Lehman’s questionable “Repo 105″ transactions which were used to hide as much as $50 billion off Lehman’s balance sheet in order to temporarily reduce its debt levels.

According to a 2,200 page report by a court-appointed examiner, sufficient evidence exists to bring malpractice claims against E & Y for failing to disclose or investigate Repo 105. E & Y may face both civil claims as well as criminal penalties.

The worst part of all this is that not one but two major corporations could have acted upon red flags raised by Michael Lee, but failed to do so. Now, one is defunct and the other faces serious penalties. E & Y already paid a $8.5 million fine to the S.E.C. in December 2009 for allowing another client to avoid restating its earnings in 2002 when accounting rules changed. It appears they may not have learned their lesson.