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Did Lehman Brothers Shoot the Messenger?

Seems like a case of Persian messenger syndrome. (The Persians really did kill the messenger who brought the bad news.)

Employees with managers at the top who only hear what they want to hear know it is bad to bring up things they don’t want to hear. This encourages a cocoon of unreality at the highest level in the organization. It’s not hard to imagine the real causes of Lehman Brothers ultimate undoing were psychological misjudgments.

This story also makes it clear that even in the wake of Enron, ‘independent’ auditors can be bought. In the case of Lehman Brothers, the Examiner found “Ernst & Young, the firm’s outside auditor, was professionally negligent…”

A worried accounting executive at Lehman Brothers, who raised the alarm about what he saw as dubious number-crunching at the doomed Wall Street bank, lost his job barely a month after alerting the auditor Ernst & Young, his lawyer claimed yesterday, in a case prompting calls for tighter protection for corporate whistleblowers.

Matthew Lee, a senior vice-president in Lehman’s finance division, outlined six allegations of unethical accounting in a memo sent on 16 May 2008 to Lehman’s senior managers, who asked Ernst & Young to investigate. In discussions with partners at Ernst & Young, he highlighted controversial “repo 105” transactions that artificially boosted Lehman’s balance sheet by $50bn (£33bn).

But the London-based accounting firm took “virtually no action”, according to an official report into Lehman’s demise and Lee’s lawyer, Erwin Shustak, said his client lost his job in late June 2008, officially as part of a broader downsizing. Shustak told the Wall Street Journal: “It was just easier to shut him up and let him go.”

Lee, 56, has emerged as a crucial figure in Lehman’s downfall and in controversy over the conduct of Ernst & Young. A court-appointed examiner, Anton Valukas, found gaping discrepancies in the accounts of E&Y partners who met Lee and concluded there are grounds for legal claims against the auditing firm for failing to meet professional standards.

The six allegations made by Lee included claims that Lehman’s monthly balance sheet listed $5bn of assets above reality, that the bank failed to value its inventory of financial products in a “fully realistic or reasonable” way, that audit-level personnel were inadequately qualified, that systems were ineffective and that there were “tens of billions of dollars” of possibly toxic liabilities.

Ernst & YoungE&Y’s senior partner responsible for auditing Lehman, William Schlich, and a colleague, Hillary Hansen, interviewed Lee. But reporting back to Lehman’s independent directors, they did not mention Lee’s key concern about repo 105, an issue which one Lehman director, the former Vodafone boss Sir Christopher Gent, later said ought to have been passed on.

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