It has just been reported that the Wall Street bank, Lehman Brothers, in its final days in September 2008 set up accounting ‘gimmicks’ which falsely gave the impression that its balance sheet was $50 billions stronger than it actually was.   and that the auditors, the UK accountancy firm, Ernst and Young, when alerted to this by the Lehman vice-president, “took virtually no action to investigate”.This is yet another example – almost daily – of the collapse of accountability in this country.   Is Ernst & Youg guilty of negligence or malfeasance?   If so, who is taking action to make them liable?   $50bn isn’t pocket money.

This is not the first time that auditors have made appalling mistakes or shown extreme culpable negligence.   Lehman Brothers had a leverage ratio of more than 30:1, i.e. for every £1 of hareholder funds, it borrowed £30.   That means that a mere 3.3% drop in the value of assets wipes out the entire value of equity and makes the company insolvent.   Auditors didn’t notice the problem, even though the warning signs were on the front pages of newpapers.

Auditors are supposed to be independent, but they are selected by directors and remunerated by companies.   They act as consultants to companies and their directors, collecting huge fees in the process when in fact they’re auditing the transactions they themselves created.   They also pick up a lot of insolvency and other work from their bank clients, but these details are kept quiet.   Fee dependency encourages silence.   The same audit firm can retain its position with a bank or company for years, creating a cosy, lucrative and corrosive relationship with the directors.   There is no compulsory re-tendering for the job.

This is a huge public scandal.   I intend to campaign via the OFT and other regulators to get this iniquity stopped.

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