On his way out the door of the New York Attorney General’s office, the new Governor Cuomo took a parting and rather overdue shot at the cozy relationship between Wall Street investment banks and their lapdogs, supposedly independent and highly ethical auditors.
Cuomo’s final act as NYAG last month was suing Ernst & Young for fraud for allowing Lehman Brothers to cook its books using “Repo 105.” That accounting practice, which may have been used by other Wall Street firms during the subprime binge, allowed Lehman to take billions of its toxic assets off its balance sheet for a few days at the end of the crucial 2nd and 3rd quarters of 2008, months before it filed for bankruptcy.
By moving toxic assets first off and then back on its books, Lehman was effectively dressing up its balance sheet in a deceptive manner. The lawsuit essentially alleges that Ernst & Young was aware of the practice, starting when it became Lehman Bros.’ auditor in 2001 until the firm’s death in 2008.
Lehman Bros.’ actions, and Ernst & Young turning a blind eye to them, stink to high heaven. Investors suffered devastating losses from the accounting chicanery. But one, huge question remains unanswered: As the financial and subprime crisis unfolded, where were the auditors who were the “gatekeepers” charged with protecting shareholders?
Just a few years ago after our last financial crisis, lawmakers in Washington took action to deter and prevent accounting shenanigans such as “Repo 105.” After the 2000 to 2003 corporate scandals, such as Enron, WorldCom, and all the rest, Congress passed Sarbanes Oxley and created the PCAOB to improve auditors’ accountability to the public to prevent fraud.
And you would think that after Arthur Andersen was destroyed by its cozy relationship with Enron that the remaining Big 5 accounting firms would learn a lesson.
But guess what: they didn’t.
Auditors were once again at the center of the financial meltdown and some are being sued for fraud.
PWC was the auditor for AIG, which wrote the disastrous CDS which forced a government bailout, as well as Goldman Sachs, which set up CDOs designed to fail and bet against its own customers.
Deloitte & Touche oversaw the demise of Bear Stearns and Fannie Mae.
It’s been a horrible decade for the auditors. The subprime crisis saw history repeat itself. Let’s hope New York’s lawsuit against Ernst & Young is the first step in severing the unholy relationship between the auditors and their banker masters.