The court appointed examiner in the Lehman bankruptcy submitted a comprehensive post mortem report on the failed investment bank. One of the misdeeds he uncovered was an accounting trick dubbed “Repo 105” which Lehman used to hide $50 billion of debt from it’s balance sheet.
The examiner is critical of Lehman’s accounting firm, Ernst & Young, for failing to investigate and disclose this “technique.” Ernst & Young knew of the Repo 105 practice as early as 2001 but Ernst & Young told the examiner that they had only signed off on the practice on a “theoretical level” and gave approval only to Lehman’s internal policy regarding the practice.
The days of E & Y may be numbered. Lawyers are already crawling all over this one and, if Enron and Arthur Andersen are any guide, big accounting firms make lucrative litigation targets. Arthur Andersen did not survive. What will happen to E & Y?