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June 15, 2010

UK watchdog investigates E&Y’s Lehman audit

A UK audit watchdog will probe Ernst & Young’s role as auditor of the failed investment Lehman Brothers.

The Accountancy and Actuarial Discipline Board (AADB) investigation will focus on the use of repurchase transactions, known within Lehman as Repo 105s and Repo 108s, as well as the role E&Y played in the preparation and audit of financial statements for the year ended November 2007.

The investigation was launched following consultation with UK professional body the Institute of Chartered Accountants in England and Wales.

Repo 105 transactions, recently derided as an accounting trick, were used to move $120bn (£79.6bn) off the bank’s balance sheet during sensitive periods.

US court appointed investigation Anton Valukas alleged this made Lehman’s financial statements and related disclosures materially misleading.

In addition, the bank did not disclose its use of Repo 105 to the US Securities and Exchange Commission.

E&Y was accused of professional negligence for allowing Lehman Brothers’ accounting practices to go unchallenged in the year before the bank’s collapse.

Earlier this year, the UK Financial Reporting Council asked E&Y to explain and provide evidence of how Repo transactions had been accounted for.

E&Y has been named as a defendant in an amended US lawsuit.

E&Y has consistently defended its Lehman audit work and promised full cooperation in the investigation. It said Lehman’s financial statements were fairly presented in accordance with relevant regulation.

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