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Ernst & Young faces probe over Lehman audit â€Ž

16 June 2010 13:30 (UTC +04:00)

In a statement, the Accountancy & Actuarial Discipline Board said it’s probing the firm’s conduct in relation to the preparation and audit of Lehman’s accounts for the fiscal year ended Nov. 30, 2007. It’s also reviewing the accounting treatment of transactions known as "repo 105" and "repo 108."

Lehman used these transactions to temporarily lower its apparent leverage and remove as much as $50 billion from its balance sheet, according to a report by a court-appointed examiner earlier this year. See story on how repo 105 worked.

The same report by Anton Valukas said there was evidence to support a possible professional malpractice claim against Ernst & Young and that claims might also be possible against some of Lehman’s competitors, including J.P. Morgan /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 38.25, +0.92, +2.46%) and Citigroup /quotes/comstock/13*!c/quotes/nls/c (C 3.99, +0.11, +2.84%) over collateral demands they made as Lehman began to fall apart. See story on potential Lehman lawsuits.

"Ernst & Young’s audit opinion stated that Lehman’s financial statements for that year were fairly presented in accordance with the relevant accounting standards, and we remain of that view," the audit firm said in a statement.

It added that it will cooperate fully with the investigation.

The announcement came as The Wall Street Journal reported that European creditors of the collapsed investment bank could get paid early.

The newspaper said administrators PricewaterhouseCoopers plan to unveil a proposal that would speed up the return of up to $22 billion of assets to unsecured creditors of Lehman. The plan would see the majority of such claims approved by the end of the year, with cash to be distributed in 2011, making the outcome years speedier that a traditional approach, the report said.

It added that details of the plan are likely to be announced later Wednesday, but that it would only be implemented if an "overwhelming majority" of the 6,500 creditors of the European business agree to it.