Scandal Hits Ernst & Young Again As Appeals Court Overrules Recent Decision

Lucas Gilmore, “Big 4″ observer
April 17, 2011 /

The three judges of the US Court of Appeals for the Ninth Circuit has reinstated the options backdating charges implicating Ernst & Young auditors over the $2.2 billion misrepresentations in Broadcom Corporation’s financial statements.

In the wake of a separate court race with the Chartered Accountants Regulatory Board in Ireland over similar charges of misappropriation, Ernst & Young could also possibly face a class action suit on grounds that it should have a knowledge about the misappropriated amounts in Broadcom’s financial statements according to the appellate court that reversed the earlier decision of a lower court exonerating the auditors.

In Ireland, where the acounting firm poses counter affidavit against the Board’s probe into the alleged loan misappropriation in Anglo Irish Bank to which it was the former auditor, Ernst & Young is trying to undermine the investigation process by challenging the Board’s appointment of special investigator John Purcell.

Ernst & Young found that the Board has not yet filed actual complaint against the auditors as required by the process and that the Board has not established a specific issue on which to focus the investigation, adding that the investigators were only referring their case to media reports.

Meanwhile, the US appellate court claimed that Ernst & Young should have seen red flags when it privately raised the issue with Broadcom. Instead, the court continued, the auditors went on giving their endorsement to the tech firm’s financial statements.

As a result of the backdating, Broadcom had to change its figures from 2000 to 2006 by $2.2 billion landing the lawsuit against Ernst & Young for its role in the scandal, which a lower court dismissed for reasons of ‘simple accounting error’ and the absence of intent to deceive investors.

However, the Ninth Circuit overruled the decision, saying the claims weigh heavily to be dismissed.

Citing the backdated amount that restated Broadcom’s financial statements, Judge Jack Zouhary wrote to the panel of three judges that “an auditor…should take a long, hard look at a transaction of $700 million, roughly a quarter of Broadcom’s reported revenue.”

The panel added that Ernst & Young “accepted management at its word, never received requested documentation and issued an unqualified opinion on the accuracy of Broadcom’s financial statements…[amounting] to no audit at all.”

In addition, the suit claimed that Ernst & Young upheld Broadcom’s financial figures even after several email correspondence asking explanations from the semiconductors company why it accounted the options backdating.


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