Ernst & Young Is WORSE Than Arthur Andersen
Value, Long Only, Contrarian
Seeking Alpha Analyst Since 2009
If such a thing is possible.
Arthur Andersen had an accounting expert, Carl Bass by name, who warned the company in internal memos that Enron's accounting was fraudulent, and was likely to embarrass the firm. As we now know, this warning proved prescient. But Mr. Bass was kept closeted in the "back office" where the frontline "practice development" types felt he belonged. But he was retained by the firm until the very end.
Ernst & Young was warned by a Lehman whistleblower about fraudulent accounting practices at the client. An accounting firm under these circumstances is expected to 1) expand the scope of the audit, and 2) warn the client's audit committee, independently of the client's management. Ernst & Young did neither.
Accounting firms have very tight "time budgets." The reason is that they aren't necessarily interested in doing what needs to be done, but rather in collecting a top hourly rate as a fee. Meaning that it can't afford to offend a client by billing too many hours. In essence, they budget for a "normal" audit, and hope that there are no "emergencies" that will derail the process.
Moreover, if they had informed the client, they WOULD have had to do extra work. Which they might not have had time to do, given their tight budgeting process. Worse, it would have been an admission that they had not done enough work in the past, or at least good enough work. Which is the best way for an auditor to get fired.
So Ernst & Young kept "mum" about a problem that would later destroy a client, not even properly informing the client itself. The whistleblower, Matthew Lee, was subsequently fired.