The Securities and Exchange Commission has begun probing Lehman Brothers former executives and looking under the rocks at other financial institutions to see if they have been using similar accounting gimmicks.
Last week, the SEC began sending out letters to the CFOs of over 20 financial and insurance companies asking about their use of repurchase agreements and how they account for the transactions, according to the Associated Press.
The move comes after the release of a report last month by Lehmans bankruptcy examiner, Anton Valukas, chairman of Jenner & Block, who found that the investment bank had made extensive use of an accounting gimmick that Lehman execs nicknamed Repo 105. The repurchase transactions allowed Lehman to shift $50 billion worth of assets off its balance sheet at the end of the first and second quarters of 2008 to make it magically appear that the firm had less debt on its books than it actually had (see Lehmans Accounting Sleight of Hand Was Less Than Magical). The firm would then buy back the same assets only days later.
Following the outcry over the bankruptcy examiners report, which also found fault with Lehmans outside auditor, Ernst & Young, the SEC is finally stepping up its investigation of Lehman as well as other financial firms. The SEC could file civil charges against some former Lehman executives, according to Charles Gasparino of FoxBusiness. Ernst & Young may also find itself in the SECs cross-hairs. The firm has reportedly hired the SECs own former enforcement chief, William McLucas, as its outside counsel. The Public Company Accounting Oversight Board is also reportedly looking into Ernst & Young's audits of Lehman, according to FoxBusiness.
So far, Ernst & Young has defended its audits of Lehman in letters sent to reassure some of its current clients, noting that it wasnt even auditing Lehman during the first and second quarters of 2008 (see Ernst & Young Defends Lehman Audits). However, the SEC is now under pressure to show it didnt drop the ball in investigating Lehman prior to the banks collapse, as it did in the Madoff Ponzi scheme.
That new get-tough approach has even been extended to some older cases, such as an accounting probe at Dell that goes back as far as 2001. The computer maker disclosed last week that the SEC sent Wells Notices to several former employees informing them that they may be on the receiving end of a civil or administrative action by the SEC. Now the SEC doesnt want to compound the problems with Lehman by overlooking any other banks and insurers that have been employing similar accounting subterfuges.
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