Lehman Brothers' auditors Ernst & Young face UK probe

image captionStaff at Lehman Brothers' London office lost their jobs in 2008

Ernst & Young, the auditors of the UK operations of the collapsed investment bank Lehman Brothers, is being investigated by an industry body.

The Accountancy and Actuarial Discipline Board (AADB) will look into Lehman's financial statements.

It will also look at the use of certain accountancy practises which critics claim allowed Lehman Brothers to hide its financial frailty.

Ernst & Young said it would cooperate fully with the investigation.

Exaggerated strength?

AADB, which investigates high profile cases in the accountancy industry, said it would look at "the preparation and audits" of financial statements made by Lehman Brothers International (Europe) in the year to the end of November 2007.

The investigation will also look into the use of accounting practises known as Repo 105 and Repo 108.

Critics claim that they allowed Lehman to exaggerate its financial strength by hiding how much it had borrowed relative to its capital.

In response to news of the UK investigation Ernst & Young said: "[Our] audit opinion stated that Lehman's financial statements for that year were fairly presented in accordance with the relevant accounting standards, and we remain of that view."

The US examiner in charge of the inquiry into the demise of the investment bank criticised the use of Repo 105 earlier this year.

Lawyer Anton Valukas also said there was sufficient evidence to support a possible claim that Ernst & Young had been "negligent", and that Lehman's liquidators could pursue claims against the firm for "professional malpractice". Ernst & Young refuted the claims.

The US financial regulator, the Securities and Exchange Commission, is also investigating the use of Repo 105 across the financial industry.

Lehman was the first major bank to collapse as part of the global financial crisis in September 2008.

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