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March 28, 2010

UK committee calls for more effective audits

The recent revelations about Lehman’s use of Repo 105 transactions illustrates the extent to which audit reports can seemingly omit crucial information, a UK House of Commons Treasury Committee report has said.

Too important to fail – too important to ignore calls for progress on the committee’srecommendation that the audit profession ensures audit reports are an effective tool for investors.

The call was initially made in the report Banking Crisis: reforming corporate governance and pay in the City, released on 12 May 2009.

The new report notes that company audits should provide investors with clear and impartial information about the companies they invest in.

It suggests the current audit process results in ‘tunnel vision’, where the big picture that shareholders want to see is lost in a “sea of detail and regulatory disclosures”.

It cites Lehman Brother’s use of Repo 105 transactions as one example.

A recent report from US court-appointed investigator Anton Valukas alleged Lehman Brothers used Repo 105 to temporarily move $50 billion off its balance sheets in the second quarter of 2008, making its financial statements and related disclosures materially misleading.

Ernst & Young did not challenge the bank’s use of the technique, which is permitted under the US GAAP standard FAS 140.


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