Friday, March 12, 2010

Creative Accountants

For years a famous line from Shakespeare's historical play King Henry VI has been usefully been taken out of context. I confess I have enjoyed twisting its original meaning to support an argument. The intent of that line was to state that without guardians of independent thinking chaos would ensue and the speaker, Jack Cade, pretender to the throne would like just that. But, "the first thing we do, let's kill all the lawyers".

Today's reading of the independent review of the Lehman Brothers bankruptcy brought those words to mind with a small twist. "Let's kill all the accountants!" The report on the event and the factors leading up to it does not put their accountants, Ernst and Young in a very favorable light. In fact it seems to me that E&Y is in danger of following Arthur Anderson into the sunset as they did post Enron.

E&Y was culpable of non disclosure of material information about the balance sheet. They were aware of and chose to remain silent on creative accounting by Lehman. If Enron was enough to take AA down, Lehman is much bigger. With E&Y's knowledge Lehman was moving tens of billions of assets off the balance sheet in a overnight cash transaction intended solely to give the appearance of greater liquidity than existed at quarter end. "Repo 105" was intended to do one thing, deceive shareholders and creditors into keeping faith in Lehman's solvency. Ernst and Young signed off on the financials as true and accurate representations of the state of Lehman's financial state. They knew that to be untrue as billions of dollars assets left and billions in cash came in overnight to tart up the books.

From Enron to Parmalat to Lehman it appears when push comes to shove outside accountants provide no value. Management generally dislikes the cost of outside audits running into the millions of dollars and investors receive no value in terms of adequate and honest disclosure of the state of a company. Let the vested interests outside of the company provide the audit function because those on the inside are sitting at the table with the dealer they have chosen. The rest of us? If you can't tell who the sucker is at the table, it's you.

John Barnyak

Poof it's gone!