"The Accountants Were the Pushers to the Street's Junkies"

I never want to make excuses for the excesses of Wall Street or the horrific judgment exercised by iBank management — you cannot, its inexcusable — but it long past time we begin holding the Street’s grand enabler’s responsible for their actions.

Which brings me to the accountants.

The New York attorney general may be bringing a civil fraud lawsuit against Ernst & Young, “accusing the accounting firm of helping Lehman mislead investors,” according to the WSJ.

The accountants were the pushers to the Street’s junkies. They allowed all manner of shenanigans to go on, under their imprimatur of legitimacy. From WorldCom to Tyco to Enron and now to Lehman Brothers, most of these frauds would not have been possible without the loving assistance of large and credible accounting firms.

And they did it for the money. Ernst & Young earned approximately $100 million in fees for its auditing work from 2001 through 2008 for Lehman Brothers.

Some people assumed that the death penalty for Arthur Anderson would have kept the industry in line. But such restraint was not to be. Thanks to yet another piece of radical deregulation, the accounting industry was given carte blanche to run wild. The Securities Litigation Reform Act of 1995 had created a civil liability out for the accountants. It allowed them to legally become Wall Street’s pushers, no longer answerable to Investors who were defrauded due to their accounting audits. It practically decriminalized accounting fraud.

Here is a piece of trivia about this ruinous legislation: Prior to becoming SEC Chair, Christopher Cox was one of the authors of the Securities Litigation Reform Act. When a radical deregulator becomes Wall Street’s chief cop, what could possibly go wrong?

Here is what I wrote in Bailout Nation about the Securities Litigation Reform Act of 1995:

“This legislation was supposed to be a way to eliminate class action lawsuits that were the bane of public companies' existence. Buried in the legislation was a little-noticed clause that eliminated "joint and several liability" for those who contribute to securities fraud. The consequences of the change were signi?cant. It removed liability for fraud from the accountants who audited quarterly statements for public companies.

What do you think happened once accountants were no longer liable? An explosion of accounting fraud! The accounting scandals of the late 1990s and early 2000s were directly attributable to this small legal change. So too was the collapse of Enron, which led to the corporate death penalty for Arthur Andersen. We can probably pin the subsequent enactment of Sarbanes-Oxley, which is undoubtedly having all sorts of its own unintended consequences, on that same clause. These all trace back to what the industry itself had requested.

As the saying goes: Be careful what you wish for; you may get it.“

We are left to wonder: Who else has questionable accounting . . .?

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See Also: Auditors Face Fraud Charge LIZ RAPPAPORT And MICHAEL RAPOPORT WSJ, December 20, 2010   http://online.wsj.com/article/SB10001424052748704138604576029991727769366.html

A Lehman Case Emerges More Than 2 Years After Collapse PETER LATTMAN NYT, December 20, 2010 http://dealbook.nytimes.com/2010/12/20/after-ernst-young-who-may-be-next/

Ernst & Young Said to Face Fraud Suit Over Lehman Karen Freifeld and Linda Sandler Bloomberg, December 20, 2010 http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=a.FUd6bUfTvo

>> a way to eliminate class action lawsuits

Gee, which “team” hates lawyers and class action lawsuits especially? Which team fielded the POTUS who must’ve signed this in 1995?

More of that great bipartisanship!

BR, Help me here…if this act removed liability how did Arthur Anderson go down and why is E & Y facing charges?

I’ve been rather shocked(yes really) at the number of Wall Street apologists on the issue of end of quarter window dressing. Arent’ the auditors supposed to be a form of adult supervision on this, providing a “good housekeeping” seel of aproval?

…repeal of Glass-Steagal

…the CFMA

…the Securities Litigation Reform Act

the enablers of the party – “Wall Street got drunk”

…all seemed to have occurred under the watch of who? just took a while for the party to get into full swing.

it is kind of amusing that many of my friends blame it on the Red team, when it was the Blue team, trying to impress the bidness class, that set in all in motion…

i guess you can’t bend the boundaries of the rules, until the rules are in place…and bend they did…

…now, too big to fail means, too big to prosecute since shares would go to zero if prosecuted…so sue the facilitators – accountants – Lehman is gone already (and, apparently, they weren’t TBTF) – it is all a show, a shame, kinda like the WWF…

wes shott … you left out yet another massive gift from the very same administration: GATT

whats terribly frustrating and frightening about this sort of thing is that we still have [otherwise] intelligent folks who will shout out that our problem isn’t deregulation; rather its an excess of increasing and obstructive regulation. i presume they just listen to the talking heads on fox or to the party blow-hards or something.

you have to hand it to those pushing the MotD … they have the sheeple screaming out their mantra for them and in true bush fashion, don’t want to be confused by any facts or data.

The General Agreement on Tariffs and Trade (typically abbreviated GATT) was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization (ITO). GATT was formed in 1949 and lasted until 1993, when it was replaced by the World Trade Organization in 1995. The original GATT text (GATT 1947) is still in effect under the WTO framework, subject to the modifications of GATT 1994.[1]

Oops, there is a typo –

It should read FOR LEMAN BROTHERS:

“And they did it for the money. Ernst & Young earned approximately $100 million in fees for its auditing work from 2001 through 2008 for Lehman Brothers.”

Andersen epilogue: Huron Consulting, an Arthur Andersen spinoff, under investigation for material misstatements in annual financials:

http://www.forbes.com/feeds/afx/2009/08/04/afx6737705.html

(Reuters) – A global consulting company that rose from the ashes of the destroyed accounting firm Arthur Andersen is now facing a scandal of its own.

The problems at Huron Consulting Group Inc (HURN) may reflect a corporate culture that carried over from Arthur Andersen, the firm that collapsed in connection with the Enron Corp scandal in 2002, legal and corporate governance experts say.

Chicago-based Huron was founded by two dozen Andersen partners. Gary Holdren, once a senior Andersen partner and a member of its executive committee, on Friday resigned as Huron’s chairman and CEO after Huron said it would restate more than three years of earnings because of misreported costs related to acquisitions.

The chief financial officer and chief accounting officer are also departing.

I don’t agree with the depiction of red vs. blue or pointing to a specific administration. The financial folly transcended party affiliation. Dereg of the FIRE industry became the consensus policy strategy and simply gained momentum and legitimacy until the collapse. We should all hope that some ‘justice’ be served because the next crisis will be far worse.

B.R. If they did it “for the money” how is that different than what the rating agencies did?

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BR: Very good young grasshopper — its not different at all!

@moss-

could not agree more

…it is not about red v blue at all..it is about the corporations v you

…and, not sure about legitimacy (unless you or of the mindset of Bubbles Greenspan) – justice is not being served because once you take TBTF as a given, justice can only be served on the periphery…and, yes, indeed the next wave will be larger than the last wave…

Its complex. The PSFLMA was vetoed by Clinton, but overridden by nearly every GOP member (McCain was a notable exception) and a handful of liberals — a weird coalition fer sure.