Auditors Now Blamed for Lehman Collapse

Thursday's Wall Street Journal reported that Ernst & Young has now been charged with civil fraud in the collapse of Lehman Brothers in late 2008. As the defunct firm's auditors, E&Y is being accused of helping Lehman hide the consequences of its lethal excesses.

Observers are accusing auditing firms of going easy on valuation methodologies used by their clients. In the case of PricewaterhouseCoopers, both AIG and Goldman Sachs used the firm, yet posted differing values for the same swaps on their respective balance sheets.

Auditors, for their part, contend that they are only to assure that proper processes are in place, not that those processes are actually used correctly.

It's not a complete surprise that things have come to this. Perhaps it's more surprising that it took so long. After Arthur Andersen was improperly attacked by the US and driven to bankruptcy, the remaining large auditors know they are in government crosshairs anytime a firm goes under for reasons that have anything to do with its accounting and/or financial statements.

However, at least one hedge fund bear, which, if memory serves, was David Einhorn, was on to Lehman's financial statement problems just by analysis of those published items. It's not like any investor didn't have reason to question what was going on.

I think the larger issue is, again, expecting poorly-compensated auditors doing SEC-mandated work to surface every corporate financial impropriety. As with so much government regulation, all the SEC-required statements have done is falsely assure naive investors that audited statements which don't expressly find problems are, in fact, a clean bill of health.

How much more meaningful if no statements were required, and those that were published had to pass truly useful standards.