Could Lehman be Ernst & Young`s Enron?

Ever since the fraud at US energy trader Enron Corp brought down accounting firm Arthur Andersen eight years ago, global auditing firms have worried that a major misstep could be fatal. Over the past few years, the firms have pushed for liability caps on litigation and settled dozens of cases, all amid concerns that each of the "Big Four" accounting firms faces potential litigation from undetected frauds at large public companies that could destroy them.

Ernst & Young became the latest auditor to come under fire this week after the court-appointed examiner in the Lehman Brothers Holdings Inc bankruptcy said the audit firm did not challenge accounting gimmicks that allowed Lehman to hide some $50 billion in assets in 2008, while claiming it had reduced its overall leverage levels. "As an auditor, you're always concerned when you're auditing a large company that ultimately fails," said Lynn Turner, a managing director in the forensic accounting practice at consulting firm LECG and former chief accountant of the Securities and Exchange Commission (SEC).

"But a lot of those do occur where the auditors come out okay and the auditors aren't at risk - obviously in this case the examiner thinks differently," Turner added. At issue is a repurchase and sale program called Repo 105, which Lehman used without telling investors or regulators, and the examiner concluded was used for the sole purpose of manipulating Lehman's books. In the examiner's report Lehman executives described the Repo 105 as everything from "window dressing" and an "accounting gimmick" to a "drug." According to the examiner's report, Ernst & Young's lead partner on the Lehman audit said the firm did not "approve" the Repo 105 accounting policies, but rather "became comfortable" with its use.

Lehman, which filed the largest U.S. bankruptcy case in history on September 15, 2008, is likely to use some of the examiner's claims to pursue lawsuits against those it believes are responsible for the investment bank's collapse. "This is like the horses getting out of the starting gate on the track - the lawyers are going to sue the pants off anyone and everybody involved," said Anthony Sabino, a securities law professor at St. John's University's Tobin School of Business.

Bryan Marsal, chief executive of Lehman Brothers Holdings Inc and co-founder of restructuring firm Alvarez & Marsal, said through a representative that Lehman "will carefully evaluate it in the coming weeks to assess how it might help us in our ongoing efforts to advance creditor interests."