Ernst and Young and Lehmans

The announcement that the American government is strongly considering prosecution of the auditing firm Ernst and Young (E&Y) following on from the collapse of Lehman Brothers, raises a number of other serious considerations.

Not for the first time, a sizeable auditing firm is being accused of  standing by whilst investors were misled about the financial condition of a company. E&Y are also being investigated by Ireland’s main accountancy body in relation to the audit of Anglo Irish Bank.

Some commentators have argued that there are fundamental flaws in the way the auditing profession almost self polices and exert enormous pressure on both Government and the regulators.

For  many years it has been felt that a conflict of interest arises amongst the big four accountancy firms by virtue of the fact that the people who pay their fees for auditing and more importantly other accountancy services including taxation services, are the very people who appoint them as auditors in the first place and it is therefore almost impossible for them to be truly independent.

The big foor accountancy firms, KPMG, PwC, Deloitte and E&Y, now audits 99 out of the 100 FTSE companies and the issue is currently being discussed in the House of Lords.

Critics of the auditing profession also point to the fact that the major accounting regular, the Financial Reporting Council, is largely staffed and controlled by these same firms.

What is really required is some form of external control of the profession to ensure such financial meltdowns of the like of Enron and Lehman Brothers just can’t happen again.

The problem is clear, the solution far less straightforward.