Category: Big 4

If it happens at a Big 4 accounting firm, we’re talking about it here.

Ernst & Young Wants a Showdown

This was worth the wait.

Directly from the firm’s website:

Ernst & Young’s Response to New York Attorney General’s Complaint

New York, 21 December 2010 – We intend to vigorously defend against the civil claims alleged by the New York Attorney General.

There is no factual or legal basis for a claim to be brought against an auditor in this context where the accounting for the underlying transaction is in accordance with the Generally Accepted Accounting Principles (GAAP). Lehman’s audited financial statements clearly portrayed Lehman as a highly leveraged entity operating in a risky and volatile industry.

Lehman’s bankruptcy occurred in the midst of a global financial crisis triggered by dramatic increases in mortgage defaults, associated losses in mortgage and real estate portfolios, and a severe tightening of liquidity. Lehman’s bankruptcy was preceded and followed by other bankruptcies, distressed mergers, restructurings, and government bailouts of all of the other major investment banks, as well as other major financial institutions. In short, Lehman’s bankruptcy was not caused by any accounting issues.

What we have here is a significant expansion of the Martin Act. Although the Martin Act is almost 90 years old, we believe this is the first time that an Attorney General is attempting to use this law to assert claims against an accounting firm, rather than the company that took the alleged actions.

We look forward to presenting the facts in a court of law.

In other words, Andy – get lost; drop dead; suck it. AM Law Daily reports that E&Y has big guns on the case:

Miles Ruthberg, a former global litigation chair at Latham & Watkins, confirmed, via an e-mail to The Am Law Daily, that he’s representing E&Y in the suit along with Latham securities litigation and professional liability cochair Jamie Wine and Kramer Levin Naftalis & Frankel white-collar defense and SEC regulatory cochair Barry Berke. Latham, which has previously represented E&Y, has been handling securities litigation against the accounting firm stemming from Lehman’s failure.

To mark this occasion, we present an appropriate video (BL-inspired):

Fraud Experts: Calls for Criminal Charges Against Ernst & Young Are ‘Absurd’

Since Andrew Cuomo decided to make our lives insanely busy this week, we’ve been talking to lots of different people about what will happen next in the Ernst & Young saga. We stumbled across a couple of experts, Dr. Mark Zimbelman an Accounting Professor who specializes in fraud, forensic accounting and auditors’ detection of fraud at BYU’s Marriott School of Business, along with his son, Aaron Zimbelman, a doctoral student at the University of Illinois at Urbana-Champaign whose research interests include auditing, financial statement fraud and corporate governance.

The father and son team have a blog, Fraudbytes, that discusses, well<arious forms including a post from yesterday about this week’s developments.


We corresponded with the Zimbelmans by email for this interview. They have combined their positions to provide us with the answers to our questions.

Going Concern: Does E&Y risk losing creditability with the market at large (á la Andersen) because of these civil fraud charges?

Zimbelmans: We don’t think this case will hurt E&Y’s credibility, based on what we know at this point. Lehman’s accounting for Repo 105 transactions was in accordance with GAAP and appears to have been a common practice for similar transactions in the industry. In other words, E&Y was probably following the letter of the law in signing the audit opinion. In Andersen’s case, the firm had shredded documents and faced criminal charges. Until we see a clearer act of wrongdoing (e.g. a clear departure from auditing standards), we don’t see E&Y individually facing a significant loss of credibility. More likely, the auditing and accounting profession as a whole will take a credibility hit as individuals question the standards and industry norms adhered to by E&Y in auditing Lehman.

GC: Reports say that E&Y is in talks to settle – how do you interpret their willingness to settle rather than litigate in this matter?

MZ/AZ: We think a willingness to settle speaks mostly to the great deal of uncertainty associated with the litigation process in auditing cases. Jury trials in cases like these can be very unpredictable and may not be strongly related to whether or not E&Y actually did anything wrong. Juries tend to have a poor understanding of auditing and accounting issues and also tend to side with victims and against deep pockets. In this case in particular, were the case to go to trial, E&Y has a good chance to become a scapegoat for the collapse of Lehman and perhaps even the economic crisis as a whole. Even if the probability of a verdict against E&Y were fairly low, the damages assigned by a runaway jury could be devastating. This gives E&Y a strong incentive to settle, regardless of whether or not they did anything wrong.

GC: Is there any advantage to litigating?

MZ/AZ: If the requested settlement amount would be devastating to E&Y, the firm is better off litigating. The firm may also be better off litigating if the requested settlement amount is high and E&Y feels they have a very solid case that has a good chance at overcoming the common jury biases we discussed in the previous question.

GC: How would you react to those who feel that are calling for criminal charges against the firm?

MZ/AZ: We don’t really see any criminal behavior here–E&Y allowed Lehman to account for Repo 105 in accordance with GAAP and in accordance with what was fairly standard in the industry. Until we see evidence of potentially criminal behavior, calls for criminal charges seem absurd.

GC: Prediction time: what happens next? Fine of $X and….?

MZ/AZ: We doubt there are any criminal issues here. E&Y will likely try to settle as quickly as possible to get this behind them. Cuomo is likely to want a huge settlement because of the magnitude of the bankruptcy and because of the potential for a runaway jury. Given that Lehman’s bankruptcy was $691 billion, this settlement could easily exceed E&Y’s Cendant settlements which were over $600 million.

Is This a Picture From Last Night’s Ernst & Young Holiday Party?

Supposedly the picture at right was from last night’s E&Y festivus/”suck it, Andy Cuomo” party and we thought we’d share it with you to see if you recognize the scene.

Our tipster simply confirmed “EY Christmas Party: awkward sexual advances,” the former being in question, the latter, well, obv We employed some detection skills to help us determine if the pic is, in fact, from last night’s festivities. Here are a few clues that lead us to believe that this is a legit picture:

1. The lady is still wearing her ID badge – Lots of Big 4 types are hardly fashion conscious, so this oversight was probably fairly common last night.

2. Three dudes, three whites shirts – No tie on twinkle toes and the guy in the background is wearing khakis. Obviously not front office.

3. Talk to the Hand – Or alternatively, “Do not take my picture with this accountant who, sure as hell, isn’t Patrick Swayze.”

If you’ve got additional evidence to prove this picture as an authentic E&Y holiday rager action shot, (e.g. post-dance photo-op with Jim Turley) we’d love to see more pics. Or if you can provide more details to give it more context: a) What song were they dancing to? b) Was this serious dancing or twisting at Jack Rabbit Slims? c) Did everyone circle around or did a conga line ensue?

Any or all of these details would be helpful.

Ernst & Young Wasn’t About to Let Some Civil Fraud Charges Put a Damper on Their Holiday Season

A trusted source emailed us that things were getting festive last night:

EY had their FSO party last night at Cipriani’s downtown. Used to be at Tavern on the Green.


This is good news. And not just because this is an upgrade from last year’s party. Despite all the bad press the firm is getting, the celebration will go on! It must go on! Now whether the Governor-elect was aware of this and purposefully decided to make a few people’s hangovers a little worse by filing the charges today, we can’t possibly know (but he does seem to have an innate sense of timing).

What we would like to find out is the mood at this fiesta. Were there a lot of long faces, grumbling about Hank Paulson, weeping in their single malts? OR did people manage to convince themselves that this whole thing is NBD and people had a good time – enjoying the open bar, power smoking Cohibas, making awkward sexual advances, partners dancing?

We need, and the people demand details, so if you were at the party email us the details.

Cuomo Checks Ernst & Young Off the Hit List

Or throws another scalp on the pile, whatever you prefer.

The Journal is obviously very cozy with the Governor-elect:

New York Attorney General Andrew Cuomo filed a lawsuit against Ernst & Young for civil fraud Tuesday, accusing one of the nation’s largest accounting firms of helping Lehman Brothers Holdings Inc. hide its financial weakness from investors for about seven years before the bank finally collapsed in September of 2008.

Ernst & Young knew about, supported and advised Lehman on its “Rs, a type of debt the bank took on, but labeled as sales, which made the firm appear to investors less risky than it really was, according to the complaint. The audit firm also stood by while Lehman misled analysts and investors on conference calls and in financial filings about its levels of risk, particularly after the firm’s stability began to crack after the credit crisis began in 2007, said the complaint.

“Ernst & Young substantially assisted Lehman Brothers Holdings Inc., now bankrupt, to engage in a massive accounting fraud,” Mr. Cuomo wrote in his complaint.

Now that the AG has pulled the trigger on this, we’re wondering what’s next. E&Y still isn’t talking, other than the statement they’ve been giving since the bankruptcy examiner’s report came out in March. One comment suggested a settlement in the nine figure range which would put them in proximity of the DOJ’s fine of KPMG back in 2005.

Colin Barr over a Fortune reports that Cuomo wants at least the audit fees back ($150 million, according to the complaint):

The complaint, filed in state Supreme Court, seeks the repayment of at least $150 million in fees the audit firm collected between 2001, when Lehman’s aggressive accounting began, and 2008, when the venerable bank collapsed, precipitating a global bank run.

“Our lawsuit seeks to recover the fees collected by Ernst & Young while it was supposed to be using accountable, honest measures to protect the public,” said Attorney General Andrew Cuomo.

Something tells us that Cuomo won’t be satisfied by simply the audit fees; we’re talking about the largest bankruptcy in history, after all. If you feel like ballparking the fine, we wouldn’t turn away any outlandish guesses.

UPDATE: Felix Salmon also points out E&Y’s lack of communicado:

E&Y knew this was coming—we all did—but despite that fact, its only public reaction so far has been to refuse to comment. That doesn’t look good, and it forces us back to what the company said in the wake of the Valukas report—that its work as Lehman auditor “met all applicable professional standards,” whatever that’s supposed to mean.

He also agrees with us that the fine will be greater than the $150 million and notes (not hiding his disappointment) that no partners were named, “E&Y will avoid admitting blame and also avoid criminal prosecution. […] [T]he only defendant is Ernst & Young LLP; there are no named individuals on the list. So E&Y’s partners are probably safe too. Sadly.”

Unless, of course, the SEC or PCAOB opt to take up that disciplinary slack. Don’t forget that some people think that Cuomo is making this move because he wants the “last scalp” before leaving the AG’s office for the Governor’s mansion. We realize pinning hopes on the SEC and PCAOB isn’t exactly comforting for those wishing to see more action but maybe Cuomo’s actions are the motivation they needed.

We’ll keep you updated throughout the day and if there’s any internal word from the hallowed walls of 5 Times Square, do email us the details.

Charlie Gasparino: Someone’s Holiday Vacation Is Holding Up the Ernst & Young Settlement Talks

The Fox Business Network ace reporter is saying that Cuomo & Co. would like to settle this thing up ASAP (a “quick scalp” before AC goes to Albany) however it is definitely not happening this week because, “According to people at Ernst & Young […] one of the lead investigators in Cuomo’s office is on vacation.”


Also interesting is that Chaz reports that E&Y thought there wasn’t going to be such a rush to get this thing settled but now everyone is all worked up because the story got leaked.

As for the SEC stuff, we don’t know what to make of it since there’s been hardly any news about talks between E&Y and the Commission. Francine McKenna told us that Gaspo “got a lot of smoke blown up his tush,” which is typical for reporters who cover Big 4 firms once in a lunar eclipse on the winter solstice.

Ernst & Young Partner May Have Known This Lehman Brothers Bankruptcy Situation Was Going to Get Worse

This was in January 2009 after the shit had hit the fan and E&Y’s partner on Lehman, Hillary Hansen, may have had an idea of how cozy she was going to get with bankruptcy examiners, the NYAG, SEC, PCAOB, etc.

Skip ahead to around 17:00 (you have to go to the website to watch) where Hansen says, “We audit Lehman Brothers, unfortunately,” to sparse chuckles.

Zero Hedge makes the case against E&Y (Hansen being the main culprit) in excruciating detail and thinks FSO might be down for the count:

[W]e are confident that (again, with the assumption that we live in some semblance of a sane/ration world), E&Y’s Financial Services Office is done (even despite such ironically apropos warnings on the firm’s website as “Top six liquidity risk management challenges for global banks “), and quite possibly the entire firm. Integrity is the number one currency for an auditor, and just like Anderson, E&Y’s just went out in a puff of green-colored smoke.

Big 4 Auditor Respectfully Requests an Audit of Big 4 “Compensation Studies”

From the mailbag:

Hey Caleb,

So recently I was found out that KPMG will be conducting a compensation study as to whether or not we are in line with “market” and the effects of the results, if any, will be announced mid-January. This came as the result of the follow up on the Mid-America senior council meeting. Apparently the question was raised in this meeting about why KPMG employees weren’t receiving bonuses similar to the other firms [Ed note: We received the following message prior to the announcement of KPMG’s new bonus program that we reported on Friday.]. During the follow-up call it was told that a “compensation study” was being performed.

I always hear all of the Big 4 talking about how they did a compensation study and found out they were in-line with the market but obviously after all of the posts about compensation raises and bonuses nothing seemed to be consistent. My question to you is where are all of these supposed studies done by the Big 4? They say they perform them but do we actually see them? As an auditor I’m inclined to ask where is the supporting documentation? We don’t take our clients word that they have $50 million in the bank we have to agree that to something, so why don’t we get some proof of this study or in your experience with goingconcern have you actually ever seen results of these studies?

Thanks,
Disgruntled Employee

Dear Disgruntled,

We understand your frustration with regards to these so-called compensation studies. To directly answer your question, we have not seen any of these studies nor do we know how the firms commission them. (If you are familiar, get in touch.) The transparency of the process, as you rightly point out, is virtually non-existent. While your call for more information regarding these studies may get some attention and even a brief consideration, don’t expect any “supporting documentation” in the near future. Keeping the compensation sausage recipe secret is advantageous for the firms and since “in-line with the market” is another way of saying, “right in the meaty part of the curve” people have very little room to complain.

Now, if it appears that one firm say, PwC, is compensating employees in a more generous manner than say, KPMG, the only way to conclude that for certain is to speak to a recruiter who talks to employees from both firms. Sure you can mine the comments of posts here or read Bob Half’s salary report to get an idea of what’s what but if you want to know the actual compensation disparity between two firms (especially for your skill set), you’ll have to do a little digging for yourself.

So, do you have the right to be annoyed by the lack of information around these studies? Of course. But don’t expect an in-depth breakdown firm by firm to be presented at your next townhall or webcast.

(UPDATE) Early More Chatter on the Ernst & Young Civil Charges

As we mentioned earlier, the Wall St. Journal has reported that out-going New York Attorney General Andrew Cuomo will be filing civil fraud charges against Ernst & Young related to its actions (mostly lack thereof) that led to the Lehman Brothers bankruptcy. Charges are expected this week but everyone is talking about it now obviously (and we were hoping for a quiet week).

Anyhoo, we’ve rounded up some of the early sound blog bites out there and we’ll keep you updated throughout the day. Of course, if you’re with E&Y and have any insight or hear some calming, soothing words from TPTB, email us t��������������������ore–>
In her column at Forbes, Francine McKenna is happy that Andrew Cuomo is actually doing something, which is more than can be said for the Feds:

Whether Cuomo is doing this on his own, in defiance of the Feds, or has their implicit blessing in light of the Federal Government’s seeming unwillingness to act, New York’s Attorney General is showing the world he’s the only one in the US with the nerve to shake this tree.

Fox News’s Greta Van Susteren is not so impressed, saying criminal charges are really what’s needed:

Attorney General Andrew Cuomo needs to get tough instead of this “window dressing” CIVIL business. He is soon to be the Governor of NYC and this is his last act as the State’s Attorney General. I hope this is not to appease Wall Street. Let a jury decide whether is is criminal behavior or not and whether anyone has committed a crime. As it stands now, Cuomo is blocking that determination with only civil charges.

Felix Salmon postulates that Cuomo is using the possibility of criminal charges to scare E&Y into a settlement:

On the other hand, a civil fraud suit is not a criminal prosecution. Even if E&Y fights the charges and loses, it probably won’t find itself on the receiving end of the kind of criminal charges which brought down Andersen. Still, I’m sure that Cuomo’s office is doing nothing to downplay the contingent existential threat here, in its negotiations with E&Y.

Yves Smith at Naked Capitalism is practically giddy and hopes that this will turn up the heat on Dick Fuld:

One can only hope turning up the heat on Ernst & Young will lead to the prosecution of Richard Fuld. The buck is supposed to stop with the CEO, particularly when they are paid as many bucks as Fuld received. Given the scale of looting that took place in the runup to and after the crisis, there is no hope of getting the banking industry back in its proper role of supporting the real economy until we see some senior bank executives in orange jumpsuits.

CNBC’s John Carney thinks that execs at both Lehman and E&Y should take the civil charges as good sign:

Why should executives at Lehman and Ernst & Young be relieved? Because the filing of civil charges rather than criminal charges may signal that prosecutors do not believe they can prove a criminal case. The key difference between criminal and civil charges in these contexts is the quality of evidence and it looks as if New York Attorney General Andrew Cuomo’s office has decided it doesn’t have the evidence to prove a criminal case beyond a reasonable doubt.

Fortune’s Colin Barr is appalled that E&Y’s Global CEO Jim Turley believes that there wasn’t any chicanery going on:

Take this exchange between E&Y chief Jim Turley and Fortune’s Geoff Colvin, from a September interview.

Colvin: Would it be fair to say that the crisis was caused in part by some financial firms doing misleading things that were within the rules?

Turley: I don’t know that it would be fair to say they were doing misleading things.

It’s remarkable Turley would still say that two months after the financial firm of the best and the brightest, Goldman Sachs (GS), agreed to pay $550 million to settle Securities and Exchange Commission charges that it misled investors in a bubble-era debt deal. The auditors weren’t involved in that one, but the Wall Street mindset was pretty obvious to everyone not running an audit firm.

Over at DealBook, Peter Henning has an interesting theory that the NYAG could be going after the accountants while the SEC focuses on individuals:

If the S.E.C. agreed to share the Lehman case with the New York attorney general, then it may be that the state took the accountants as the focus of its investigation while the federal government concentrates on individuals. Such a division of labor would allow each to husband resources by avoiding any duplication of effort in the investigation – and may be the reason the state is planning to file charges before the S.E.C. decides to act.

Emily Chasan at Reuters managed to get a statement out of someone (Charlie Perkins’s phone has likely exploded by now) although the firm is sticking to the talking points:

A spokeswoman for Ernst & Young said the company did not comment on speculation and repeated a previous statement made by the firm about its dealings with Lehman Brothers. “Throughout our period as the auditor of Lehman, we firmly believe our work met all applicable professional standards, applying the rules that existed at the time,” the statement said.

Matt Taibbi (whole post is worth a read) is calling for the paramedics:

My guess is that this suit is the beginning of the end for Ernst and Young and, who knows, may be the beginning of a series of investigations that ultimately take down the auditors and ratings agencies that made the financial crisis possible. Without accountants and raters signing off on all the bogus derivative math and bad bookkeeping, a lot of this mess would never have happened.

We’ll be updating this post with more reactions and as things develop.

Marin County Adds ‘Racketeering’ to the List of Allegations Against Deloitte

Hell hath no fury like an obscure California county that feels completely gypped (to the point that they feel it’s fraudulent) by the largest professional services on Earth.

Marin officials fired another salvo in an escalating $105 million legal war with international computer consultants, filing a new lawsuit Thursday accusing them and a former county official of violating racketeering law in a bid to rip off taxpayers.

The new suit was filed against Deloitte Consultant LLP, software developer SAP and former assistant auditor-controller Ernest Culver, who served as project director of the county’s troubled computer installation before quitting to join SAP.

As you may recall, Marin County’s original suit against Deloitte for $35 million involved allegations of “fraud, misconduct and misrepresentation” which included using ‘neophytes’ on the implementation of the county’s ERP system. The new racketeering charges are especially interesting and the Marin Independent Journal has the details:

It alleges a conspiracy, asserting consultants wined and dined Culver and interviewed him for employment at the same time Culver was approving deficient work on the project, approving fee payments and helping line up new contracts.

“County taxpayers were charged for millions of dollars in services that Deloitte failed to properly perform” and residents were “defrauded of the honest services of a high-ranking county official,” according to County Counsel Patrick Faulkner.

Deloitte denied the allegations of the original suit, saying that Marin County was actually responsible for the snafu. However, and unfortunately for Deloitte, new shit has come to light:

Faulkner disclosed that the county has combed through its computer system to retrieve thousands of e-mails issued by consultants and Culver while they worked in county offices, providing a backbone for accusations leveled by the latest suit.

The complaint alleges six violations of the federal Racketeering Influenced and Corrupt Organizations Act by Deloitte and SAP, and three counts of illegal conduct against Culver, including a violation of the state anti-corruption statute.

So it doesn’t sound like there’s a smoking gun per se but enough back and forth that adds up to this:

The lawsuit, the county said in a press release issued late Thursday, claims that when problems with Deloitte’s work surfaced, Deloitte and SAP engaged in a “cover-up that included bribing Culver to falsely ‘approve’ Deloitte’s defective work, and silencing an SAP employee who tried to intervene on the county’s behalf.”

So, in other words, pretty bad stuff. The MIJ reports that “Settlement talks are expected and while the parties remain at odds, the latest court filing could spur negotiations.” Using our best translation skills, this more or less says, “Deloitte, SAP and Culver realize they’re fucked – begrudgingly – and will be going to the table any day now to sort things out.”

The Independent Journal also reports that SAP, Deloitte or Ernest Culver “could not immediately be reached.” Our own messages with Deloitte spokemen Jonathan Gandal and John La Place were also not immediately returned.

Marin County alleges racketeering in new lawsuit over computer debacle [MIJ]