- The Big Picture - http://www.ritholtz.com/blog -

Blame the Accountants — and Deregulation

Posted By Barry Ritholtz On December 21, 2010 @ 7:03 am In Bailout Nation,Legal,Really, really bad calls,Regulation | Comments Disabled

I never want to make excuses for the excesses of Wall Street or the horrific judgment exercised by iBank management — you cannot, its inexcusable — but it long past time we begin holding the Street’s grand enabler’s responsible for their actions.

Which brings me to the accountants.

The New York attorney general may be bringing a civil fraud lawsuit against Ernst & Young, “accusing the accounting firm of helping Lehman mislead investors,” according to the WSJ [1].

The accountants were the pushers to the Street’s junkies. They allowed all manner of shenanigans to go on, under their imprimatur of legitimacy. From WorldCom to Tyco to Enron and now to Lehman Brothers, most of these frauds would not have been possible without the loving assistance of large and credible accounting firms.

And they did it for the money. Ernst & Young earned approximately $100 million in fees for its auditing work from 2001 through 2008 for Lehman Brothers.

Some people assumed that the death penalty for Arthur Anderson would have kept the industry in line. But such restraint was not to be. Thanks to yet another piece of radical deregulation, the accounting industry was given carte blanche to run wild. The Securities Litigation Reform Act of 1995 had created a civil liability out for the accountants. It allowed them to legally become Wall Street’s pushers, no longer answerable to Investors who were defrauded due to their accounting audits. It practically decriminalized accounting fraud.

Here is a piece of trivia about this ruinous legislation: Prior to becoming SEC Chair, Christopher Cox was one of the authors of the Securities Litigation Reform Act. When a radical deregulator becomes Wall Street’s chief cop, what could possibly go wrong?

Here is what I wrote in Bailout Nation [2] about the Securities Litigation Reform Act of 1995:

“This legislation was supposed to be a way to eliminate class action lawsuits that were the bane of public companies’ existence. Buried in the legislation was a little-noticed clause that eliminated “joint and several liability” for those who contribute to securities fraud. The consequences of the change were significant. It removed liability for fraud from the accountants who audited quarterly statements for public companies.

What do you think happened once accountants were no longer liable? An explosion of accounting fraud! The accounting scandals of the late 1990s and early 2000s were directly attributable to this small legal change. So too was the collapse of Enron, which led to the corporate death penalty for Arthur Andersen. We can probably pin the subsequent enactment of Sarbanes-Oxley, which is undoubtedly having all sorts of its own unintended consequences, on that same clause. These all trace back to what the industry itself had requested.

As the saying goes: Be careful what you wish for; you may get it.

We are left to wonder: Who else has questionable accounting . . .?

>

See Also:
Auditors Face Fraud Charge [1]
LIZ RAPPAPORT And MICHAEL RAPOPORT
WSJ, December 20, 2010  
http://online.wsj.com/article/SB10001424052748704138604576029991727769366.html

A Lehman Case Emerges More Than 2 Years After Collapse [3]
PETER LATTMAN
NYT, December 20, 2010
http://dealbook.nytimes.com/2010/12/20/after-ernst-young-who-may-be-next/

Ernst & Young Said to Face Fraud Suit Over Lehman [4]
Karen Freifeld and Linda Sandler
Bloomberg, December 20, 2010
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=a.FUd6bUfTvo


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2010/12/blame-the-accountants-and-deregulation/

URLs in this post:

[1] WSJ: http://online.wsj.com/article/SB10001424052748704138604576029991727769366.html

[2] Bailout Nation: http://www.amazon.com/exec/obidos/ASIN/0470596325/thebigpictu09-20

[3] A Lehman Case Emerges More Than 2 Years After Collapse: http://dealbook.nytimes.com/2010/12/20/after-ernst-young-who-may-be-next/

[4] Ernst & Young Said to Face Fraud Suit Over Lehman: http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=a.FUd6bUfTvo

Copyright © 2008 The Big Picture. All rights reserved.