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Outcome of investigation: Lehman Brothers International (Europe)

PN 031
29 Jan 2013


The Financial Reporting Council (“FRC”) announces the outcome of its investigation into the conduct of Members of the ICAEW and Ernst & Young LLP (“E&Y”), Member Firm of the ICAEW, as auditors to Lehman Brothers International (Europe) (“LBIE”). The FRC is independent of the professions it disciplines and operates in the public interest.
 
Following the conclusion of the investigation, the FRC’s Executive Counsel, Gareth Rees QC, has decided that no action should be taken against E&Y or any individuals in connection with their conduct in this matter.
 
Executive Counsel’s summary of the investigation and his conclusions are set out below. On 9 September 2010 the Accountancy and Actuarial Discipline Board (“AADB”) considered the matter of LBIE and decided, pursuant to paragraph 5(8) of the AADB Accountancy Scheme (“the Scheme”), that the matter should be investigated.
 
  • LBIE was authorised and regulated by the Financial Services Authority (“FSA”). LBIE was permitted to handle client money and was obliged to comply with the FSA’s Client Assets Sourcebook (“CASS”) when doing so.  LBIE went into administration on 15 September 2008. PricewaterhouseCoopers LLP were appointed administrators of LBIE. 
 
  • The administration identified a significant shortfall in the pool of money held on trust for clients, which should have been segregated and safeguarded in accordance with the rules set out in CASS (“the CASS Rules”).  At the start of the investigation, it appeared that LBIE failed to comply with the CASS Rules in a number of respects, however E&Y signed off their accountant’s report to the effect that LBIE was in compliance with the CASS rules. One of the main areas of concern was whether the treatment of money LBIE received from affiliates, post MiFID, complied with the CASS rules.  Another important issue was whether money relating to LBIE Prime Brokerage clients required segregation.
 
The scope of the FRC investigation was as follows:
 
“The conduct of Members and a Member Firm in relation to the preparation of reports to the FSA in respect of Lehman Brothers International (Europe)’s compliance with the FSA’s Client Asset Rules for the year ended 30th November 2007.”
 
  • The focus of the investigation was the audit by E&Y of Lehman Brothers International (Europe) (“LBIE”) and its compliance with the CASS rules.  E&Y audited client money opt out arrangements, client classification and the segregation of client money post MiFID.
 
  • In the course of the investigation, the investigation team obtained and reviewed E&Y’s audit files and hard copy documentation. The team also interviewed E&Y audit team staff.
 
  • This matter was referred to an expert to consider the case.  Following this, Executive Counsel has decided that there is no realistic prospect that a Tribunal would make an adverse finding against E&Y in the UK or Members within that firm. The investigation will therefore be closed and no further action taken.
 
Notes to editors:
 
  1. The FRC is responsible for promoting high quality corporate governance and reporting to foster investment.  We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work.  We represent UK interests in international standard-setting.  We also monitor and take action to promote the quality of corporate reporting and auditing.  We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
 
  1. In relation to disciplinary matters, the FRC is the independent, investigative and disciplinary body for accountants and actuaries in the UK dealing with cases which raise important issues affecting the public interest. In brief, the stages of the disciplinary process are:
 
  • Decision to investigate
  • Investigation
  • Decision whether to bring disciplinary proceedings against Member Firm or Member and, if so decided, referral to Disciplinary Tribunal
  • Tribunal hearing
  • Determination and imposition of sanction and/or costs orders
 
  1. The FRC can start a disciplinary investigation in one of two ways: (i) the professional bodies can refer cases to the FRC; and (ii) the FRC may decide of its own accord to investigate a matter. The Conduct Committee will consider each case identified or referred to it and decide whether or not the criteria for an investigation are met.
 
  1. Investigations are conducted by Executive Counsel and the Professional Discipline team within the Conduct Division. If disciplinary proceedings are to be commenced, Executive Counsel will deliver a complaint to the Conduct Committee. The Conduct Committee will then instruct the Convener to appoint a Disciplinary Tribunal.
 
  1. Disciplinary complaints filed following an investigation are heard by an independent Tribunal which will normally sit in public. If the Tribunal upholds a complaint, there is a wide range of sanctions which it can impose including an unlimited fine, exclusion from membership of a professional body covered by one of the Schemes and withdrawal of practising certificates or licences.
 
  1. All Press enquiries should be directed to: Sophie Broom, Communications Executive, on telephone: 020 7492 2395 or email: s.broom@frc.org.uk.
 


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