E&Y asked to explain Lehmans audit

The Financial Reporting Council has asked Ernst & Young to explain how it audited the books of US investment bank Lehman Brothers before it went bust in 2008, Britain's accounting watchdog said on Monday.

The FRC officials have been studying a 2200 page report from US examiner Anton Valukas on the collapse of Lehman.

The report, published last Thursday, said there was sufficient evidence to support a possible claim that the firm's auditor, Ernst & Young, had been "negligent" and that Lehman could pursue claims against the firm for "professional malpractice".

"Following the publication of the recent report on Lehman Brothers, the FRC is ascertaining the facts on how the 'Repo' transactions were accounted for and audited in the UK in order to determine any implications," the FRC said in a statement.

"To that end, we have asked Ernst & Young to provide further information in relation to what happened in the UK," the FRC said.

Repo 105 refers to an accounting technique - described by Valukas as a gimmick - that helped lower the struggling bank's apparent leverage by US$50 billion ($71 billion).

The repo effectively allowed Lehman to park US$50 billion of assets and liabilities off balance sheet, lowering its reported leverage at a critical time.

Ernst & Young had no immediate comment on the FRC statement.

Valukas said Ernst & Young's lead partner on the Lehman audit "became comfortable" with the use of Repo 105 to lower apparent leverage.

Lehman transferred assets to its London unit, which was the only jurisdiction where the bank could get lawyers at Linklaters to sign off on the deals.

- Reuters