Audit Notes: Better Cohan, Ernst Whopper, WSJ Walkback

I was highly critical of a William D. Cohan piece in the Times two weeks ago pleading for mercy for a convicted white-collar criminal.

So it’s nice to be able to applaud a Cohan piece this week:

Frankly, the idea that Fuld was unaware of Repo 105 is not credible, especially as he was devoted to reducing the appearance of risk on the firm’s balance sheets. But if that’s the sorry argument that Team Fuld wants to make, at the very least it once again shows the world the face of a leader so out-of-touch, and yet so ridiculously overpaid, that only one long overdue conclusion can be reached: Until it is once again in the financial interest of every senior Wall Street banker to thoroughly understand and monitor each and every product his firm is shoving out the door, and to stop them from being created and sold if there is even the tiniest shred of concern, then all the tedious and expensive re-regulation that Congress and the White House are seeking to implement will have exactly zero chance of preventing another financial crisis.

He also annotates part of the Valukas Report dealing with the Repo 105 shenanigans. This is something you can only do on the Web, and it’s great stuff.

Bloomberg’s Jonathan Weil calls Ernst & Young on a whopper in its statement defending its Lehman Brothers auditing.

“After an exhaustive investigation, the examiner made no findings in his report that Lehman’s assets or liabilities were improperly valued or accounted for incorrectly in Lehman’s November 30, 2007, financial statements,” E&Y said, referring to the last fiscal year for which it performed a full-fledged audit of Lehman’s books.

Part of that statement is a half-truth. The other part stretches the truth past the breaking point.

It’s true the examiner, Anton Valukas, didn’t find that Lehman’s assets or liabilities were improperly valued at the end of 2007. One thing E&Y left out: Valukas did find evidence that Lehman used unreasonable asset values for the first and second quarters of 2008, including one investment he said was overvalued by as much as $500 million.

E&Y issued signed opinion letters for both quarters. Those letters, which Lehman disclosed in its financial filings, said the firm had reviewed Lehman’s financial statements and found nothing wrong.

Check out the list of E&Y accounting scandals at the bottom of the column.

— The Journal walks back part of its story yesterday on a federal judge rebuking the SEC for a proposed settlement with Wall Street:

In a ruling Monday, U.S. District Judge William H. Pauley III in New York approved several changes that weakened that enforcement action. Though it keeps a firewall that forbids stock analysts and investment bankers from talking without a rules-compliance officer present, the decision essentially eased other restrictions involving the dealings between investment bankers and analysts, including a clear separation between analysts and the firms’ investment-banking operations.

Not so tough after all.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.