Friday, 12 March 2010

Echoes of Andersen haunt Lehman report

There will be some worried people at Ernst & Young right now. The mammoth 2,500 page report into the collapse of Lehman Bros has, in my admittedly hurried reading of the executive summary, uncomfortable echoes of the Enron collapse which took Big Five Accountancy firm Arthur Andersen with it.

Apparently, according to the report, Ernst & Young acting as auditor to Lehman’s, turned a blind eye over a number of years to the use of Repo 105 transactions which, and I quote, are devices to “manipulate the balance sheet” and make a company appear much more financially stable than it really is. I seem to remember that Special Purpose Vehicles (SPVs) did much the same for Enron.

All of this will only add to concerns, which have been aired for many years now, that the relationship between the major (now Big Four) accountancy firms and their audited clients is far too cosy. I witnessed, during my own albeit brief time spent in the world of accounting, the client services director calling ‘crown jewel’ audit clients to ask them for feedback on how their audit had gone and how the process could be ‘improved’ in the future.

Robert Bruce in The Times many years ago, in his Audit column, expressed deepening concern about the cosiness. As Bruce pointed out the audit process should be no more comfortable than the extraction of teeth for those companies involved.

Perhaps now it is time to dust off some of those ideas regularly floated by the likes of Professor Prem Sikka (I bet he’ll have something to say about this) for reform of accounting. How about all companies over a certain size have to change their auditors every two years? Or, appointed auditors are barred from undertaking any other fee paying work such as tax advice?

What’s the phrase, “simples”.


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