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13/03/2010 02:00:04, Lehman administrators consider damning report »»

David Jetuah, Accountancy Age, Friday 12 March 2010 at 17:38:00

PwC, the administrators of Lehman Brothers European arm, considers report criticising Lehman accounting and the bank's auditors Ernst & Young.

PwC, administrators of Lehman Brothers European business, is considering its next move in the wake of a damning report which criticises accounting policies at the investment bank and the role of auditors Ernst & Young.

A senior figure close to the administrators confirmed they had the option to pursue the auditors through the courts if they concluded there was a case to answer.

Accountancy Age understands PwC administrators are considering the report and their next steps.

The source said the issue was "too complex" to provide a snap judgement.

Administrators will take their time to digest the facts contained in the 2,200 page dossier before deciding whether to take the matter to court.

A report for the US Bankruptcy Court released late on Thursday accused E &Y of being "professionally negligent" in its audit of the collapsed banking giant.

E&Y dispute the allegations.

The report centred on the use of so called repo transactions, used to move high risk assets off its balance sheet.

It claimed the transactions - known as Repo 105s - had no economic substance.

PwC is continuing its attempts to claw back cash for creditors of Lehman Brothers European arm. Administrators have already returned $13.3bn (£8.8bn) to creditors, as of September last year.

Ernst & Young said in response to the publication of the report:

Lehmans bankruptcy, which occurred in September 2008, was the result of a series of unprecedented adverse events in the financial markets. Our last audit of the Company was for the fiscal year ending November 30, 2007. Our opinion indicated that Lehmans financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view.

"After an exhaustive investigation the Examiner made no findings in his report that Lehmans assets or liabilities were improperly valued or accounted for incorrectly in Lehmans November 30 2007 financial statements.

"The leverage ratios that were reported in Lehmans Managements Discussion and Analysis (MD&A) were the responsibility of management, not the auditor. They are not part of the audited financial statements."

This would not be the first time administrators have gone after the auditors of a collapsed company.

In 2005, PwC sued auditors KPMG for negligence over the collapse of insurance giant Independent Insurance. The case was settled out ofcourt.

E &Y negligent in Lehman audit, report claims

Report claims E&Y knew about repo transactions

Lehman CFOs warned of reputation risk

Lehman assets funneled through UK arm

13/03/2010 02:00:04, Report claims E&Y knew about Repo transactions »»

Mario Christodoulou, Accountancy Age, Friday 12 March 2010 at 16:25:00

E&Y said it did not set up or approve repo arrangement

Ernst & Young's US arm was aware of Lehman Brothers practice of offloading liabilities, a central plank to the banks' alleged attempts to hide its true financial position, a report released has claimed.

In a report for the United States Bankruptcy Court, examiner Anton Valukas, claims Lehman took advantage of repo-transactions - used to quickly raise funds for a fixed period - to temporarily remove assets from its balance sheets.

William Schlich, E&Ys lead partner on the Lehman audit team, said he was aware of the transactions, known in Lehman as Repo 105, but did not approve or set it up, according to the report.

According to Schlich, Ernst & Young had been aware of Lehmans Repo 105 policy and transactions for many years, the report states.

Ernst & Youngs view on the transactions was allegedly not based on whether it complied with guidelines, rather, Ernst & Youngs review of Lehmans Repo 105 Accounting Policy was purely theoretical,, the report states.

Lehman allegedly manipulated a techincal definition of a sale to temporarily displace its liabilities, which resulted in billions of pounds in liabilities being removed from its balance sheet in the years leading up to its collapse.

Valukas team asked Schlich whether, as part of its responsibility to ensure Lehmans financial statements were not materially misstated, Ernst & Young should have considered the possibility that strict technical adherence to accounting rules could nonetheless lead to a material misstatement in Lehmans publicly reported financial statements,.

"Schlich refrained from comment", according to the report.

In a statement Ernst & Young said: "Our last audit of the company was for the fiscal year ending November 30, 2007. Our opinion indicated that Lehman's financial statements for that year were fairly presented in accordance with US Generally Accepted Accounting Principles, and we remain of that view."

E &Y "negligent" in Lehman audits, report claims

13/03/2010 02:00:04, PwC's Newberry appointed MCA president »»

13/03/2010 02:00:04, PwC suffers Satyam setback »»

13/03/2010 02:00:04, Lehman assets funnelled through UK-based arm »»

Mario Christodoulou, Accountancy Age, Friday 12 March 2010 at 11:38:00

Bankruptcy report finds Lehman Brothers used UK-based arm to help US business undertake controversial transactions

Lehman Brothers used its London-based arm to funnel billions of dollars into short-term loans designed to artificially bolster its books, according to a report into the collapsed bank.

In a report for the United States Bankruptcy Court, examiner Anton Valukas, claims Lehmans took advantage of repo-transactions, used to quickly raise funds for a fixed period, to temporarily remove assets from its balance sheets.

This transactions were recorded as sales, which kept billions in liabilities off its balance sheet.

According to Valukas, Lehman could not find a US law firm to provide an opinion letter. They used an opinion letter from British Magic Circle law firm Linklaters, which was made to Lehmans London-based European arm, Lehman Brothers International Europe (LBIE).

Linklaters is now advising on the administration of LBIE. For the first six months of the insolvency the firm earned £33m.

Lehman's US arms transferred their assets to LBIE in order for LBIE to conduct the transactions on their behalf, according to the report.

The bank did not disclose the arrangement which enabled it to temporarily remove approximately $50bn (£33bn) of assets from the balance sheet at the end of the first and second quarters of 2008, the report claims.

In a statement, Linklaters said: "The US Examiner's report into the failure of Lehman Brothers includes references to English Law opinions which Linklaters gave in relation to a number of Lehman transactions. The Examiner - who did not contact the firm during his investigations - does not criticise those opinions or say or suggest that they were wrong or improper. We have reviewed the opinions and are not aware of any facts or circumstances which would justify any criticism."

13/03/2010 02:00:04, Lehman CFOs were warned of "reputational risk" of transactions »»

13/03/2010 02:00:04, Online accounting software now on iPhone and Blackberry »»

13/03/2010 02:00:04, We can halve £178bn deficit without tax hikes: Labour »»

13/03/2010 02:00:04, Pompey administrator investigate mystery payments »»

13/03/2010 02:00:04, HSBC stolen data finds its way to tax authorities »»

13/03/2010 02:00:04, E&Y "negligent" in Lehman audits, report claims »»

Mario Christodoulou, Accountancy Age, Friday 12 March 2010 at 09:18:00

E&Y says Lehman's financial statements were "fairly presented"

Big Four auditors Ernst & Young were professionally negligent in allowing collapsed bank Lehman Brothers to use off balance-sheet devices in the years before its collapse, a sensational report into the banks demise has claimed.

In a report prepared, for the United States Bankruptcy Court, examiner Anton Valukas claims Ernst & Young, allowed key reports to go unchallenged as senior executives channeled fund through an off balance sheet vehicle known as Repo 105

In a statement reported on the BBC's website the firm said: "Our last audit of the company was for the fiscal year ending November 30, 2007. Our opinion indicated that Lehman's financial statements for that year were fairly presented in accordance with US Generally Accepted Accounting Principles, and we remain of that view."

According to the report, Lehmans recorded Repo 105 transactions as sales rather than financing transactions, which meant accounting rules did not require Lehman to record the liabilities arising from the cash borrowings.

Valukas claims the transactions to temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days, to create a materially misleading picture of the firms financial condition in late 2007 and 2008.

Lehmans net leverage ratio for November 30, 2007 was 16.1x. Without the balance sheet benefit of Repo 105 transactions, Lehmans net leverage ratio would have been 17.8x, according to the report.

Repo transactions involve the owner of financial assets swapping them in return for cash but with an agreement to buy them back at a future date. They are a common way of raising short-term financing. The deals are classed as " financing" and therefore the assets remain on the balance sheet because the owners are deemed to have retained control of them.

In Lehman's case the repo deals were booked as sales because the bank could claim to have lost control of the asset, even though they bought them back later.

Loss of control was based on the idea that Lehman took less cash than its assets were worth (in Lehman's case the bank offered assets worth 105% of the cash it received , hence the name of the transaction - Repo 105). As a result Lehman would not have enough money to buy the assets back on the open market. Control of the asset is, therefore, lost and Lehman could take the assets off the balance sheet until they were bought back.

13/03/2010 02:00:04, HMRC to drop Andronikou challenge as Portsmouth administrator »»

13/03/2010 02:00:04, Regus's insolvency strategy enrages property trade body »»

Rachael Singh, Accountancy Age, Thursday 11 March 2010 at 12:19:00

British Property Federation calls for insolvency rules to be tightened

One of the largest office providers, Regus, has angered landlords by using an insolvency process to negotiate reductions in rent on some of its properties.

Regus, the global company, has given some of the UK's largest landlords an ultimatum to cut the rent of its unprofitable offices by having rent free periods and discounts in future, the Financial Times reported.

The British Property Federation (BPF) has condemned the move as it claims Regus is using the law to allow parts of the business to be packaged into a company which can claim to be insolvent even if the parent company is profitable.

A statement from the BPF said: "It is unclear why the leases would not revert to the profitable parent company in the event of any vehicles set up to absorb leases going into administration."

Liz Peace, chief executive of the BPF, added: This appears to be a cynical move by a highly regarded company, and is the first time a part of the property industry has used such tools against the rest. Landlords are caught between rock and a hard place when it comes to bailing out occupiers at the expense of their shareholders or facing the prospect of empty space and the costs that come with it.

We need to see the insolvency rules tightened up to stop this kind of abuse and landlords need to think about asking for some kind of clawback if they make concessions to enable them to obtain some benefit from the upturn when occupiers they bail out come back," she added.

Although Regus declined to comment on the potential use of insolvency procedures in its business, a spokesman confirmed it planned to "regear" a small number of its portfolio which consists of more than 135 properties.

He explained a "regear" meant a negotiation to reduce rent and extend the leases.

A statement by Regus added: The UK is the toughest business environment of our geographies. Like many other companies with operations in the UK we are seeking to regear a small number of leases."

"However, we remain fully committed to our operations in the UK. We will continue to grow our leadership position in the UK and are contracted to open six centres in the next two months.

13/03/2010 02:00:04, AMEC and Punch swap auditors »»

13/03/2010 02:00:04, KPMG chairman to sit on RBS board »»

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