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January 29, 2013

FRC takes no action against E&Y over Lehman audit

The UK Financial Reporting Council (FRC) has concluded that no action will be taken against Ernst and Young (E&Y) concerning the audit of Lehman Brothers International (Europe) (LBIE).

FRC executive counsel Gareth Rees decided there is "no realistic prospect" of an "adverse finding" against the firm or Institute of Chartered Accountant in England and Wales members therein, thus the investigation is closed and no further action taken.

The FRC investigation followed a decision by the Accountancy and Actuarial Discipline Board (AADB) in September 2010 to examine E&Y’s audit of LBIE for the year ended 30 November 2007and its compliance with the Financial Service Authority’s (FSA) Client Assets Sourcebook (CASS) Rules.

The AADB decided LBIE: was authorised and regulated by the FSA, was permitted to handle client money and obliged to comply with CASS when doing so.

When LBIE went into administration in 2008 and PwC were appointed administrators, a significant shortfall was discovered in the pool of money held on trust for clients "which should have been segregated and safeguarded", according to CASS Rules.

The FRC said when the investigation started it seemed LBIE failed to comply with the CASS Rules in a number of respects, however, "E&Y signed off their accountant’s report to the effect that LBIE was in compliance with the CASS rules".

The investigation focussed on E&Y’s audit of the treatment of money LBIE received from affiliates, post MiFID, client money opt out arrangements and client classification. It also examined "whether money relating to LBIE Prime Brokerage clients required segregation."

The FRC investigation team reviewed audit files and hard copy documentation and interviewed audit staff before referring the matter to an expert.

Related articles

E&Y UK cleared over Lehman audits

E&Y under investigation in US and UK

Related links

Financial Reporting Council

Ernst and Young

Institute of Chartered Accountant in England and Wales

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