Role of auditors

I want to make a refrence to the audit report of lehman brothers which was audited by E&Y Newyork I am quoting the exact statement made in the audit report"Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances". Lehman Brothers filed quarterly accounts with the SEC for the period of May 31 2008 and on July 10 2008 and still then there was no questions about its financial health Despite the deepening financial crisis, auditors did not express any reservations about the value of investments or any scenarios under which company may be unable to honour its obligations. Just two months later, Lehman collapsed.
Just go through the audit report of lehman brothers and u will find that lehman brothers posted a wooping net income of $4192 millions which was 5% more then the previos year The auditors provided variety of services like risk managment,assesing the efficiency of internal controls.By providing these many services auditors were like a quasi managment and what i think they were not able to objectively evaluate the outcome of the transactions that they themself have helped to create
During 2007, Ernst & Young collected fees of $31,307,000 from Lehman Brothers, compared to $29,451,000 for 2006. The fees for 2005 and 2004 were $25,324,000 and $24,748,000 respectively. Over the last four years, Ernst & Young collected over $110m in fees, of which nearly $14m is for advice on tax and other consultancy services.The scale of fees also raises questions about the independence of the auditors
Already lot of questions are being raised regarding mark to market accounting concept and the bill passed by US goverment has given power to SEC to suspend this concept
I think audit of banks and financial institutions should be done jointly by regulators and audit firms so that a greater transparecy can be ensured and regulators would also be in a better position to address the issues

Faliure of regulatory policies

I think the root of the fall of the 4th largest IB is the ignorance of parallel banking system which existed in US which includes lehman brothers all the regulations kept focusing on the traditional banking systems which allowed devlopment of these unregulated parallel system.These system financed huge amounts to real estate and consumer borrowing without any deposit base it relied on rollover funding from money markets .These loans were converted into financial intruments and traded among the financial firms and when prices started falling they incured huge losses and there capital wiped out and all the rollover funding got freezed up The basic loop holes in the regulatory and accounting policies were

1. As in case of traditional banks there lending was based on custumer deposits and deposits were resonably insured so it provided a kind of shock absorber to them but no such policy exist for parallel banking system
2. Lesser control of the fed reserve over such banking system induced them to engage in risker lending
3. Fed has provided for all the banks a mark to market accounting but most of them are sheilded from it as most of there loans are held by them and are priced at mark to realization basis but if they are converted into instruments there market value tend to be lower because of market conditions
4. Lot of liquidity injections are provided by the fedral reserve to the banks but no such policy exixt for the parallel banking system

so lot of protection is provided to the banks but no such protection exist for parallel banking system so that is what i said that policy need to be reworked for a better financial system