Posts Tagged ‘Ernst & Young’

I can’t stand it.  Do a Google search on Ernst and Young’s new rebranding effort, and images of naked men are returned.

I now think of porn every time I hear the firm’s name (Ernst & Young) or see its initials (EY).  Trust me, I have no desire to see porn every time I do a Google search on this Big 4 firm.  And I have regular need to perform Google searches on each of the Big 4 (as well as several other accounting firms).

To be perfectly clear:  I don’t want to see pictures of naked men or naked women, soft porn or hard porn, when researching accounting firms.

This was not a problem for me prior to the rebranding, because I always thought of the firm’s full name.  But all of Ernst’s & Young’s recent promotional efforts have been directed toward encouraging all of us to think of them as EY, which is synonymous with naked men.  So in effect, Ernst & Young has created the conditions for me to be aware of and think of porn.  I object!  I would rather imagine young male accountants in traditional business attire.

I am aware of no other reputable business that is encouraging its customers and interested parties to encounter a pornographic linkage.  An Ernst & Young spokesman said that its clients are able to skip over the pornographic images and choose only the bona fide Ernst & Young links.  Yes, but those clients are always going to see porn images upon doing a search for EY.

A few moments ago, I performed a Google images search on EY.  18 of the first 21 images returned contained images of naked men.  Check it out below.


Come on, EY.  We accountants are better than this.

Debit and credit – – David Albrecht

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Ernst & Young, now EY, has a ‘sexy boys’ problem.


Pic credit: LA Times

Ernst & Young on July 1 announced it was rebranding itself as EY.  Lopez writes,

[Ernst & Young, EY] now shares a name with a racy magazine, EY! Magateen. The magazine, which features scantily clad young men, is the work of Luis Venegas, a Spanish creative director known for his flamboyant, sexually charged fashion publications.

A Google image search of “EY” brings up photos of young male models clad in low-cut briefs, right alongside the Ernst & Young logo and some exterior shots of the company’s offices.

What a massive fail!

When I went to images.google.com, one picture returned was that of a naked man.  A hand was covering his private parts, but pubic hair was clearly visible.

I could comment, or I could take the high road.  EY seems to have taken the low one.

Debit and credit – – David Albrecht

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The auditor disciplinary arm of the Financial Reporting Council (FRC) of the UK has concluded its investigation and on June 22, 2012 announced that Ernst & Young (EY) is not to be penalized for its audit of the November 30, 2007, financial statements of Lehman Brothers Holdings Inc (LBHI).

Executive Counsel considers that there is no realistic prospect that a Tribunal would make an adverse finding against Ernst & Young LLP in the UK or Members within that firm. The investigation will therefore be closed and no further action taken.

Coupled with an earlier announcement from the Securities and Exchange Commission (SEC) of the US that no legal proceedings are likely to be initiated against EY or its employees, this marks the end of one the darkest chapters in recent accounting and auditing history.

Although EY will not be penalized for failing to alert investors to LBHI’s sophisticated scheme to manipulate its financial statements, it has embarrassed itself and shamed all of us in the accounting and auditing industry.

EY has showed itself to be no better than Arthur Andersen.  Ernst & Young, shame on you. 

The FRC is the regulator and standard-setter in the UK responsible for corporate governance and financial reporting as well as the audit, accounting and actuarial professions.  It is not a governmental unit, but a private organization.  It operates in the public interest.

The FRC operates in a manner similar to the Financial Accounting Standards Board (FASB) and Public Company Accounting Oversight Board (PCAOB) of the US.

A unit of the FRC, Accountancy and Actuarial Discipline Board (“AADB”), has investigated Ernst & Young over the LBHI matter.  This is its summary of the investigation:

  1. On 10th June 2010 the Accountancy and Actuarial Discipline Board (“AADB”) considered the matter of Lehman Brothers (“Lehmans”) and decided, pursuant to paragraph 5(8) of the AADB Accountancy Scheme (“the Scheme”), that the matter should be investigated by the AADB.
  2. Lehman Brothers Holdings Inc. (“LBHI”) sought Chapter 11 protection in the United States of America on 15thSeptember 2008. The US Bankruptcy Court nominated an Examiner, Anton R. Valukas, who published his report into Lehmans’ collapse on 11th March 2010. The report made criticisms of Lehmans’ auditor, Ernst & Young, for failing to question and challenge improper or inadequate disclosures in Lehmans’ financial statements. The Examiner’s criticisms specifically related to the use by Lehmans of transactions known as Repo 105 and Repo 108 transactions. The report did not specify whether the criticisms related to the primary auditor of LBHI, which was Ernst & Young in New York, or Ernst & Young generally.
  3. Repo 105s and Repo 108s were used by Lehmans to raise short term funds and, by virtue of compliance with US Financial Accounting Standard 140 (“FAS140”) which requires certain transactions to be treated as sales instead of financing transactions, enabled Lehmans to reduce its balance sheet and leverage ratios. The Examiner found that whilst the use of Repo 105/ 108 transactions may not have been inherently improper its sole function as employed by Lehmans was balance sheet manipulation.
  4. The scope of the AADB investigation was as follows:“The conduct of Members and a Member Firm in relation to: (a) the preparation and audits of the financial statements of Lehman Brothers Holdings Inc.and UK operations including Lehman Brothers International (Europe) for the year ended 30th November 2007;and (b) the use and accounting treatment of transactions known as “Repo 105s” and “Repo 108s” by Lehman Brothers Holdings Inc. and UK operations including Lehman Brothers International (Europe).”
  1. The focus of the investigation was the audit by Ernst & Young LLP in the UK (“EYUK”) of Lehman Brothers International (Europe) (“LBIE”) and of Repo 105 and Repo 108 transactions which were conducted through LBIE.  EYUK audited the trial balance of LBIE prepared under US GAAP for consolidation into LBHI’s consolidated financial statements. The audit of LBIE’s trial balance formed the basis of a ‘Specific Scope Conclusion’ to Ernst & Young in New York.
  2. In the course of the investigation, the investigation team obtained and reviewed EYUK’s audit files; hard copy documentation; information from EYUK staff members’ laptops and emails, and information from other regulators. The team also interviewed EYUK audit team staff and former members of staff of Lehmans.

Debit and credit – – David Albrecht

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Following journalists and bloggers has become part of my daily routine.  I pay attention to what is written and to its impact.  In accounting, there tends not to be too much impact, because regulators, corporate executives and audit firm managers seem impervious to what other people say.  They always do what they darn well want to.

Dena Aubin, David Ingram and Sarah N. Lynch, however, have been able to see the power of their pens.

Dena Aubin is a journalist for Reuters who writes on auditing.  David Ingram is a Reuters journalist who writes on lobbying and business.  Sarah N. Lynch is a financial regulatory reporter.  In various combinations, they have partnered on an interesting series of articles:

In today’s post I’ll write about the first and third of their series.

In  “Ernst & Young tightropes between audit, advocacy,” Aubin and Ingram write about Washington Council Ernst & Young (WCEY) and reactions to their activities.  Aubin and Ingram report that WCEY (a unit of Ernst and Young) provides lobbying services valued at $12 million per year.  WCEY does enough business that I had become aware of its existence.  Some of its clients also engage Ernst & Young to audit their financial statements.

And that’s the rub.  It is a violation of both common sense and professional ethics that I find shocking.

Aubin and Ingram reported that Senators Carl Levin and Jack Reed were now expressing concern.  Aubin and Ingram were unable to receive public comment from the SEC and PCAOB on the issue.

On March 8, I was skeptical that anything would happen to dissuade Ernst & Young from this practice.

On Friday, May 4, I received a pleasant surprise.  In “Ernst, clients, cut auditing ties-records.”  Ingram and Aubin report that an examination of reports filed under the Lobbying Disclosure Act revealed that some of Ernst’s audit clients were no longer lobbying clients.  None of the companies, nor Ernst & Young, would comment on the relationship changes.

However, the cause and effect seems obvious.   The first story apparently showed enough light on the Ernst & Young lobbying activity that it changed what it was doing.

Congratulations Dena and Dave!

Also included in the article are comments from the SEC:

The chief accountant for the U.S. Securities and Exchange Commission, James Kroeker, speaking at a financial reporting conference at Baruch College in New York on Thursday, said SEC rules state an auditor should not act in an advocacy role for a company it audits and lobbying would be inconsistent with that.

Kroeker did not mention any audit firms by name.

He said: “If you think about lobbying in the traditional sense, you would say, ‘wouldn’t somebody that’s lobbying be placing themselves in a position to be an advocate?'”

Asked whether the SEC was looking into E&Y’s lobbying activities, an official in the agency’s enforcement division declined to comment because its investigations are not public.

“We are aware of it and we are cognizant of what the rules are,” said Howard Scheck, chief accountant of the SEC’s division of enforcement, on the sidelines of Thursday’s conference.

“If there’s a violation that we find, we’ll certainly do something about that,” he said, without referring to E&Y.

I’m impressed with these journalists, Aubin, Ingram and Lynch.  Their articles have shown original fact finding, effective organization, and a steady flow from start to finish.  I’m adding them to the list of business journalists whom I follow.

Debit and credit – – David Albrecht

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Anton Valukas is a Chicago attorney who as alternated stints as a federal attorney with the Justice Department prosecuting white collar criminals, with a law practice defending white collar criminals.  He is well known for serving as court appointed bankruptcy examiner in the bankruptcy of Lehman Brothers.  After an 18 month investigation, his team published a nine volume, 2200 page report.

Valukas carefully documents how Lehman Brothers engaged in Repo 105 & 108 transactions to improve the appearance of the company’s liquidity on its balance sheets.  Valukas concludes that there are reasonable grounds for the government to purse litigation against Lehman Brothers executives.  The State of New York has already filed a civil fraud lawsuit against Ernst & Young for its part in what is alleged as accounting fraud.

On Sunday, April 22, 2012,  Steve Kroft interviewed Valukas on the popular CBS show, 60 Minutes. The following clip from the interview is a CBS teaser or advertisement for the show.

In the short clip, Valukas says the only reason for Lehman Brothers to engage in Repo 105 transactions was to impact the leverage numbers on the company’s balance sheet.

The entire 60 Minutes segment, “The Case Against Lehman Brothers,” can be viewed by clicking on the following link:


The transcript of the segment is available at the 60 Minutes site.

A key exchange between Kroft and Valukas is,

Steve Kroft: Did these quarterly reports represent to investors a fair, accurate picture of the company’s financial condition?

Anton Valukas: In our opinion, they did not.

Steve Kroft: And isn’t that against the law?

Anton Valukas: It certainly, in our opinion, was against civil law if you will. There were colorable claims that this was a fraud, yes.

By colorable claims Valukus means there is sufficient evidence for the Justice Department or the Securities and Exchange Commission to bring charges against top Lehman executives, including CEO Richard Fuld, for overseeing and certifying misleading financial statements, and against Lehman’s accountant, Ernst and Young, for failing to challenge Lehman’s numbers.

Anton Valukas: They’d fudged the numbers.

At the end of the segment, Kroft speculates that the reason the SEC has not filed any suits is because it does not have a winnable case, given that it had personnel on premise3s at Lehman, and these personnel were aware that Repo transactions were going on.  Valukis wonders if the personnel had the expertise to fully comprehend what was going on.

Debit and credit- – David Albrecht

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On August 16, 2011, the PCAOB opened a 120 day comment period on the concept release in which it proposes mandatory auditor rotation.  Relevant information about the matter are included in Docket 37, “Concept Release on Auditor Independence and Audit Firm Rotation.”

With two weeks left in the comment period, the only audit firm to submit a comment letter is Ernst & Young.  Expect KPMG, PWC, Deloitte, McGladrey, Grant Thornton and BDO to submit their comments soon.   I’m certain that each letter will be similar in message to that of Ernst & Young.,

Ernst & Young submitted its letter on November 18, about four weeks before the December 14, 2011, deadline.  In general E&Y’s message is that auditors are sufficiently skeptical of management’s assertions that in general, financial reporting is a benefit to investors.  Because the system works at the current time, no changes are needed.  In any case, E&Y does not like the idea of mandatory rotation.

Mandatory audit firm rotation, in our view, is not a necessary or constructive means to promote
auditor skepticism. There is no evidence that we are aware of suggesting that mandatory firm rotation will improve audit quality. Moreover, there are many identifiable and known downsides to such a policy with little to no certain benefit. A mandatory audit firm rotation model would not only give rise to substantial costs and disruptions, but also would, we believe, impair audit quality, undermine sound corporate governance, and detract from the ability to maintain a robust accounting profession —all to the ultimate disadvantage of the interests of investors. We believe the mandatory retendering approach suffers from the same or even greater disadvantages.

There are five reasons why E&Y “… believe[s] mandatory firm rotation would harm corporate governance and investor interests and the ability to maintain a robust, highly skilled independent accounting profession performing high-quality audits.”

  1. Negative effect on shareholders, corporate governance and audit committees.”  E&Y says this would result from meddling with the duties of the audit committee.
  2. Negative effect on auditor’s knowledge of the company being audited and the effectiveness of audits.”  E&Y argues that long auditor tenures are beneficial, not detrimental.
  3. Negative effect on public companies and the interests of their shareholders.”  E&Y argues that a new auditor’s efforts would be inefficient (and therefore more costly) and less effective (thereby increasing audit failure risk).
  4. Negative effect on the audit profession.” E&Y says that there would be increased costs to auditor and audit team relocation once a five-year engagement ends.  In addition, the firm’s focus would shift away from delivering quality audits to a focus on marketing.
  5. Effect on audit fees.” E&Y thinks audit fees are bound to increase.  Since it foresees no advantages to auditor rotation, it is a negative NPV proposition.

There you have it. E&Y didn’t say anything controversial.

I can’t wait to read what the other firms have to say.

Debit and credit – – David Albrecht

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Over on the the AECM listserv, several of us are fans of Ed Ketz (Penn State prof) and his Accounting Cycle column at SmartPros.  For example, when Bob Jensen passes along the link to Ketz’s latest editorial, he always labels it “Ketz Me If You Can.”  Tom Selling (Accounting Onion), sometimes calls his editorials, “The Betz From Ketz.”  For my part, I occasionally feature Ketz on these pages, saying to myself, “Letz Getz Ketz on this.”

Today, Ed Ketz published an absolute must read editorial on his Accounting Cycle, “NY v. Ernst & Young: Who Cares Whether Lehman Brothers Followed GAAP?

Ketz starts off by saying that Ernst & Young intends to fight the civil lawsuit alleging fraud in the Lehman Brothers case.  I’ve noticed the same thing.  In anticipation of a trial, E&Y has petitioned to have the case heard in federal district court instead of a New York state court.  Based on pretrial statements, E&Y has repeatedly mentioned that Lehman Brothers was following GAAP, so technically no rules were broken.

Ketz notes that the current case is very similar to the 1960s Continental Vending case (US v Simon 425 F.2d 796).  In this case three auditors from Lybrand, Ross Brothers, and Montgomery were charged with criminal fraud.  Ketz writes:

While agreeing with the facts presented by the federal prosecutors, the defendants relied on a number of expert witnesses, all of whom stated that the deficiencies mentioned above were not part of generally accepted accounting principles.  The trial judge issued directions to the jury that negated this perspective by maintaining that “the ‘critical test’ was whether the financial statements as a whole ‘fairly presented the financial position of Continental as of September 30, 1962, and whether it accurately reported the operations for fiscal 1962.”  The jury found the defendants (auditors)  guilty.  The auditors appealed, but the circuit court affirmed the decision.  The auditors then appealed to the Supreme Court, but it denied certiorari. [emphasis mine]

I think Ed Ketz’s analysis is sound.  Although we can’t foresee the judge’s rulings in this case, E&Y is at risk here.   Based on what I have read in the the Valukas report and the NY court complaint, it is my opinion that Lehman Brothers adopted its accounting practices with the intention to deceive investors and regulators.  As such, their accounting shenanigans are absolutely repugnant to me.  What’s more, I believe that E&Y auditors were aware of this motive, and blessed the accounting anyway.  Technically correct or not, Lehman Brothers intended for its financial statements to not fairly present the results of operations.  And E&Y opined that they did fairly present.

Will the jury be allowed to base its decision on the fairly presented issue?  Tune in later.

Debit and credit – – David Albrecht

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Today, December 21, 2010, the Attorney General of the State of New York filed civil suit against Ernst & Young for fraud in connection with financial reporting by Lehman Brothers.

Does this mean that we have entered the era of the Big 3?

The charges (Ernst-Young-Complaint) were filed by New York Attorney General Andrew M. Cuomo on behalf of the citizens of New York.  Here are a few key excerpt (with my highlights on key wording):

E&Y substantially assisted Lehman Brothers Holdings Inc. (“Lehman,” or the “Company”), now bankrupt, to engage in a massive accounting fraud, involving the surreptitious removal of tens of billions of dollars of securities from Lehman’s balance sheet in order to create a false impression of Lehman’s liquidity, thereby defrauding the investing public.

The allegations conclude with:

E&Y knew every significant aspect of Lehman’s Repo 105 transactions, and knew that the Lehman financial statements violated Generally Accepted Accounting Principles (“GAAP”), which require that such statements (a) not be misleading, (b) fairly disclose the Company’s financial position, and (c) not omit material information necessary to fairly present the financial position. As the public auditor for Lehman, E&Y had the absolute obligation to ensure that Lehman’s financial statements complied with GAAP and did not mislead the public.  Instead of fulfilling this obligation, E&Y gave a clean opinion each year, erroneously stating that Lehman’s financial statements complied with GAAP. E&Y sat by silently while Lehman deceived the public by concealing the Repo 105 transactions and misrepresenting the Company’s leverage. By doing so, E&Y directly facilitated a major accounting fraud, and helped Lehman mislead the public as to its true financial condition. E&Y, which reaped over $150 million in fees from Lehman, must be held accountable for its role in this fraud.

In the complaint, Cuomo alleges that Lehman Brothers was engaging in Repo 105 transactions from 2001 until 2008 (date of Lehman bankruptcy) with full knowledge and approval of Ernst & Young.  Allegedly, Ernst & Young knew the motivation for the Repo 105 transactions was to distort the financial statements.  Also, allegedly Ernst & Young knew that in practice Lehman’s transactions violated the terms of the Linklaters letter of safe harbor.

Until settled in a court of law, Ernst & Young stands legally innocent.  However, if these charges are true, then I simply can’t imagine that any investor would view any Ernst & Young audit opinion as credible.  Even if Ernst & Young escapes these charges, my faith in the firm has been shaken to the core.

Debit and credit.

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Lehman Brothers used an accounting gimmick to increase a key percentage in its balance sheet, thereby appearing to be better off that it actually was.  This accounting gimmick was used to hit certain target numbers in an attempt to (1) keeping stock prices from dropping, and (2) forestall regulators from stepping in and forcing bankruptcy at an earlier date.

In the end, it was not enough to save the company.

Lehman capitalized on a “bad” accounting rule that allows what is called off-balance sheet financing.  Specifically, Lehman was able to remove liabilities from the balance sheet, thereby reducing leverage (the relative percentage of financial liabilities) and increasing the relative percentage of capital (or stockholders equity).

Was it an attempt to deceive?  Obviously, but activities that fudge some number happen every day in every company.  Was it material, or large enough to deceive?  At first glance the numbers involved are pretty small.  I’ll walk you through the analysis, but you have to go through a lot to find any percentages boosted a material amount.  But materiality is a judgment call, and Ernst & Young might not have reasoned the Repo 105 use was material (I’ll explain how to justify E&Y’s position).


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