Ernst & Young, one of the world’s ‘Big Four’ accountancy forms, has been found to have allowed Lehman Brothers, the vast US investment bank that collapsed in September 2008, to hide $50bn (£34bn) of debt off its books in an effort to show its financial position was much stronger than it was.   This misled investors, as it was intended to do, and fundamentally distorted the market until the bank finally crashed for other reasons.

The device used was a sales programme known as Repo 105 which via the artificial sale and buy-back of deals made it look as though a company or bank hadn’t borrowed as much money as it actually had.   The trick has been described as ‘window dressing’ or an ‘accountancy gimmick’.   It may seem arcane, but the deceit is deliberately perpetrated on a scale to enrich or impoverish millions.   No burglary or larceny gets within a million miles of it.

There are several important lessons from this which have almost totally escaped notice in this country.   First, we would never even have heard anything about it were it not for the investigations of the US court examiner Anton Valukas.   Why did Britain’s accountancy regulator (AADB) completely fail to pick it up?

Second, was this an unfortunate one-off or does this E&Y fiasco signal the tip of the iceberg?   If E&Y, one of the world’s biggest accountancy firms can indulge in subterfuge on this scale, how corrupt if the accountancy profession as a whole?   It’s not as though these enormous firms are unaware of Repo 105 since (even more than the police) they have the powers to examine anything and can interview anybody without a court order.

Third, if highly prestigious firms like this can indulge in such shenanigans, how can honesty and transparency be restored?    That points to the root of the problem – that accountancy firms are reliant on their clients because they pay their fees.   That has a corrupting influence on what they do and don’t do, on what they say publicly, and on the bad news that they bury.   What is needed is frequent auditing by an independent public regulator so that there is no conflict of interest between integrity and payment.

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