Lehman Case Shows Audit Firms Still Putting Client’s Interest Ahead Of Investors (WMT, COP, TGT)

Bloomberg reports that Ernst & Young’s auditing of Lehman Brothers’ (OTC: LEHMQ) accounts shows that audit firms still put clients interest ahead of those of investors.

After the collapse of Enron and WorldCom, auditors had come under fire for their audit work at the companies, which had cooked books and duped investors. This resulted in Congress passing the Sarbanes Oxley act eight years ago to prevent another Enron, or WorldCom from happening. However, Lehman’s case has shown that not much has changed in how auditors deal with their clients. According to Lehman’s bankruptcy examiner, there was credible evidence of misconduct by Ernst & Young as it failed to question Lehman on the transactions used to hide billions of dollar in debt off balance sheet.

In a testimony in front of a U.S. house appropriations subcommittee, Mary Schapiro, Chairman of SEC, said, “Lehman report raises serious questions about Sarbanes-Oxley and many of the protections that were put in place post-Enron. One would hope that the law’s reforms would have prevented this kind of conduct.”

Ernst & Young received $21.8 million in audit fees from Lehman Brothers, which was its only client on Wall Street, in 2007, according to a filing with the SEC by Lehman. This was higher than total fees it received from other clients, which included Wal-Mart (NYSE: WMT), ConocoPhilips (NYSE: COP) and Target Corporation (NYSE: TGT). This could have possibly led to ignorance from the accounting firm even though it had knowledge about the repo 105 transactions used by Lehman.