Not Counting (Part 1)

So who is the new scoundrel in the Lehman fiasco?

Now that the bankruptcy examiner has reported his findings, what can we learn that’s new? Not that Lehman cooked its books. That was evident some time early in 2008, when spreads on their debt ballooned. Not that some politicians had a soft spot for their competitors. Hello? Did anyone notice where Hank Paulson and Bob Rubin used to work?

No, the villain today is the accounting firm Ernst and Young. Not the guys down the street who do your taxes. The high-powered auditors, who, along with the other two big firms execute 99.9% of the dollar-weighted accounting audits in America. If you’re an investor who likes to delve into the fundamentals of the companies that you’re buying or lending money to, I have news for you: these firms are not your friends.

Somewhere between footnote 12 and 23 the company made “materially misleading” statements that the auditors should have caught. But world-class accountants are caught in a web of conflict and complexity that makes it almost impossible for them to be objective.

The result is a byzantine maze of arcane rules that only an initiate of the Divine Order of the Big Three is authorized to interpret. And that’s not in anyone’s interest.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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