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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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