Speculation that its scathing portrayal in the US bankruptcy examiner’s report on the Lehman Brothers collapse could turn Ernst & Young into the next Arthur Andersen has simmered down somewhat. But if the accounting giant is eventually pursued for culpability in its role in the investment bank’s meltdown (after all, the examiner wrote, “Colorable claims exist that Ernst &Young did not meet professional standards…,”) corporates—both its clients and others—are likely to groan. There are precious few world-class accounting firms left, and the turmoil caused by Arthur Andersen’s demise after the Enron bankruptcy did no one, especially its clients, any good.
If Lehman creditors were to successfully sue E&Y for failing to advise the investment bank’s audit committee that the firm lacked adequate liquidity due to its reliance on dodgy repo accounting, that could be a significant blow to the auditing giant. Whether it would be fatal is another matter—although the reputational risk element in the ongoing investigation is quite high.
The members of The NeuGroup’s Internal Auditors’ Peer Group, which met last month, see the chances of a complete E&Y meltdown as fairly low. Nonetheless, in informal discussions at the meeting they indicated that they were more likely to give business to “second-tier” firms, such as BDO Seidman, Grant Thornton and their ilk, to support these firms and ensure they are up to speed and can step in, if necessary, to pick up the slack if the worst-case scenario for E&Y plays out.
The paucity of world-class accounting firms is worsened by the fact that most of the top shops have consulting practices, too. Consulting has a higher profit potential—and much lower risk—than accounting, and so the firms seek to peddle their consulting work aggressively. Unfortunately, they can’t do both for a single client, which further narrows the playing field. This means that, even if the second-tier accounting firms are brought up to speed and prove themselves able to tackle the biggest MNC clients, a major problem at E&Y would still significantly crimp the competitive landscape for auditors—something, despite E&Y’s alleged shortcomings, no sensible corporate wants to see.