E&Y saga raises audit choice questions - again
Posted by admin in on Tue, 16/03/2010 - 17:23
How we all love a good drama, and the event unfurling at Ernst & Young regarding the collapse of Lehman have certainly provided some primetime viewing.
Now that UK regulator the Financial Reporting Council has demanded that the Big Four firm hand over vital documents detailing its role in the collapse of Lehman Brothers, the rumour mill has gone into overdrive with speculation about a potential collapse of a Big Four player leaving firms, large corporate and regulators very twitchy indeed.
Ernst & Young was accused of professional negligence in relation to its audit of the US bank. The accusations hinge on trades that allegedly enabled the bank to disguise risky debt structures built up in the two years before the investment bank spectacularly collapsed.
An explosive 2,200 page, nine volume report into the Lehmans collapse written by court-appointed examiner Anton Valukas and published in the US last week said the bank used controversial accounting techniques known as "repos" to disguise billion-dollar holes in its balance sheet.
The bankruptcy judge presiding over the Lehman case who agreed to the report being made public, Judge James Peck, has admitted it read "like a best seller". But for Ernst & Young the implications of the report are at best extremely damaging, and a worst catastrophic. And the knock on effects for the UK’s largest corporate cannot be underestimated.
When, eight years ago, the unthinkable happened and the Enron scandal saw the end of global accountancy firm Arthur Anderson, the view was that we could never allow the Big Four firms to be whittled down to a Big Three.
Eight years on, and endless debates about audit quality and audit competition later, and we are faced with a situation where the Big Four’s stranglehold on the FTSE100 remains virtually unchallenged.
PricewaterhouseCoopers, KPMG, Deloitte and Ernst & Young sign off the accounts of 95% of the FTSE 350 and 63% of all UK-listed companies, according to the latest advisor rankings published by Hemscott.
But it is among the largest public companies where their dominance is especially pronounced. Only one FTSE100 company, mining group Randgold Resources, uses an auditor from outside the Big Four -- BDO. All of which means the Big Four’s share of the market remains unchanged from four years ago, when the FRC first began its crusade to widen audit choice for big business.
A statement by E&Y that a thorough internal review of its practices showed the firm did nothing wrong is unlikely to be enough to silence the gossip and inevitable speculation about the long term impact that this latest bout of reputational damage will cause.
We’ve had Enron the musical. My money’s on Lehman, the sequel. Whether or not Ernst & Young will have a starring role remains to be seen.
The Bottom Line: A political masterclass in negotiation
"Some expert politicking and negotiation on the part of Nick Clegg and his team resulted in the new coalition government. Reed Finance's Lynsey Rattigan advises on how to brush up on your own workplace bargaining tactics to your career advantage."