December 21, 2010
Ernst & Young Media Criticism
Posted by David Zaring

Why would Andrew Cuomo, the tough, but seemingly-less-tough-than-Elliot-Spitzer AG, file civil fraud charges against Ernst & Young on his way out the office door and into the governor's mansion?  If the case kills the company, Cuomo is going to have a reputation that makes Spitzer look like a piker, of course.  But it probably won't kill E&Y, because it's a civil case, and the one way that criminal corporate sanctions matter is that they can put gatekeeper firms, like Arthur Anderson, out of business.  Civil charges can't do that.

Anyway, here's Going Concern with an especially helpful roundup, concluded by a post from Matt Taibbi, which features him at his best and not so best.

Taibbi is good when he observes:

In the second quarter of 2008, [Lehman] lightened up their balance sheets with $50 billion worth of Repo agreements. This technique, apparently known as "window dressing," isn’t that much different conceptually from the Enron-style book-doctoring that used "independent" special purpose vehicles to hide liabilities. In this case Lehman didn’t use shell companies but instead scattered its dent in the financial atmosphere by booking loans as sales. Ernst and Young, which made over $100 million in fees between 2001 and 2008 working with Lehman, aided the process by signing off on Lehman’s crazy accounting.

This is totally true, right up to and including the Enron example, and I've never understood why the kind of end-of-the-quarter window-dressing that appears to be de rigeur corporate accounting is permitted.  Seriously.  If bankruptcy can undo pre-bankruptcy transfers of wealth, why can't accounting?  At any rate, it's lucidly, not angrily, explained, and gets to one of the hearts of the matter.  

Taibbi is not so good when he predicts that:

My guess is that this suit is the beginning of the end for Ernst and Young and, who knows, may be the beginning of a series of investigations that ultimately take down the auditors and ratings agencies that made the financial crisis possible. Without accountants and raters signing off on all the bogus derivative math and bad bookkeeping, a lot of this mess would never have happened. Zero Hedge has an excellent piece detailing all the ass-covering and finger-pointing going on at Ernst and Young; check it out if you have time.

Killing Arthur Anderson, a worldwide company with tens of thousands of employees, all but maybe four or five of whom had nothing to do with Enron, never struck me as particularly good policy, but more like, it's the cover-up-not-the-crime style discipline.  So I think it is naive to wish for it, nor do I think it is in the least likely to happen. Zero Hedge is full of angry posters who have picked 30 of the last 2 fraud uncoveries.  Those guys are nuts, and if Taibbi is using them as the basis for his confident predictions of the death of an accounting firm, he's sourcing, let's say, broadly.

Another thing - I always think that the bankster crowd should take a deep breath when presented with indictments, and pretend that the conduct that occurred happened to someone they like.  You know, what if a union official was convicted of fraud?  Kill the union?

Accounting, Crime and Criminal Law, Financial Crisis | Bookmark

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