The conclusions from last week's report have surprised many about what went on leading to the downfall of Lehman Brothers.
How could management have been allowed to manipulate the investment banks' results so materially, even as they painted a different story to investors in their public filings? Why does it appear that the auditors, Ernst & Young, were so complicit with what management was doing in the months leading up to Lehman's bankruptcy filing? How was the board of directors not informed that this was going on? And most importantly, what should be learned from all of this going forward?
Some have opined that this "black eye" for E&Y will be their Enron. It will suffer the same negative publicity that Arthur Andersen did after it became clear that the energy company was cooking its books under the watch of the auditor. This bad publicity eventually led to the collapse of the accounting firm.
We're still in the early days of discovering what E&Y knew and didn't know about what happened at Lehman, so it's a little premature to suggest that E&Y is headed for the same fate as Andersen.
Even if it is discovered that E&Y was just as "guilty" as Andersen, there are many reasons to think that E&Y will continue. The world is in a much more fragile place today than it was in 2002 -- at least according to the Obama administration and government officials in many other large countries. Real reform of the financial system has been put on the back-burner. Saving the existing system is the priority.
What's the different between E&Y and Andersen? Andersen/Enron was a discrete failure, with culpable and easy scapegoat actors. What we're living through is the aftermath of a systemic failure where even the government was to blame. Where do you start with reform?
When you're living through a four-alarm fire, the thinking on the part of the government seems to go, you don't repaint the trim on the house. They're trying to put the fire out, and that means keeping the status quo.
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[This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.]
