First there was Andersen, now it's Ernst & Young. The Enronisation of Lehman Brothers continues with the New York Times reporting that Lehman Brothers' auditors Ernst & Young could face legal action over their collusion in the collapse of the financial services firm.
As I reported here last week, Ernst & Young signed off on those accounting tricks that allowed Lehman Brothers to hide toxic assets and make its debt levels look better than what they actually were. A report from the court-appointed examiner finds there is sufficient evidence to bring claims of malpractice against E&Y.
The audit model needs to be overhauled. As accounting critic Prem Sikka warned two years ago, the way things are run will inevitably result in malpractice.
Sikka writes: "Time and time again it has been shown that the basic audit model is faulty. Private sector auditors cannot be independent of the companies that they audit. This fundamental faultline has not been addressed by the post Enron reforms. In addition, the ex-post financial audits are too late and cannot alert financial regulators of problems."
Sikka says audits of major companies, particularly banks and financial institutions, are carried out directly by the regulators.
But given the performance of the Securities and Exchange Commission, you would have to wonder whether regulators have the expertise. Perhaps it's time for governments to start looking at this. Because it will happen again.
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