Path: bloom-picayune.mit.edu!enterpoop.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.twt.news From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: S&Ls' accounting firm to pay U.S. $400 million Date: Tue, 24 Nov 92 14:12:10 EST Message-ID: Lines: 106 \SE A \HD S&Ls' accounting firm to pay U.S. $400 million \BY David R. Sands \CR THE WASHINGTON TIMES Ernst & Young, the nation's biggest accounting firm, agreed yesterday to pay the government $400 million to settle claims related to its audit work for some of the most spectacular savings and loan failures of the 1980s. The settlement, worked out in intense negotiations over the past eight months, represents one of the largest payouts ever by a professional firm related to the S&L debacle. The Big Six accounting firm hammered out the deal with the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the Resolution Trust Corp. The settlement calls for a $400 million payment, tighter internal controls for the firm, and reprimands and sanctions for 10 current or former Ernst & Young partners. Ernst & Young faced government claims of more than $1 billion for its work with about two dozen insured S&Ls and banks. Some of its clients included such notorious S&L disasters as Charles Keating's Lincoln Savings and Loan in Irvine, Calif.; Silverado Banking S&L Association of Denver; and Vernon Savings & Loan Association of Dallas. Harris Weinstein, chief counsel of the Office of Thrift Supervision, said yesterday that Ernst & Young decided "they wanted to stop being part of the problem and become part of the solution." He called the settlement fair in light of the firm's financial resources. At a news conference, Ernst & Young Chairman Ray J. Groves refused to comment on whether the firm felt it was negligent in its audits, calling the decision to settle "a clear-cut business decision." With Ernst & Young facing years of expensive litigation, Mr. Groves said the "decision to settle reflects a practical assessment of what makes sense for the firm as a business organization." Asked about the quality of the firm's S&L audits, Mr. Groves said, "In hindsight, we would wish that some of the people who had not run their institutions well were not our clients," adding that the firm has tightened up its screening of new business prospects. Ernst & Young's 1,900 partners will pay $100 million of the settlement over the next four years, with the remaining $300 million to be paid by a phalanx of nearly 200 insurers that backed the firm over the past decade. Mr. Groves said the auditing firm's "financial future is sound" but added that liability insurance premiums will undoubtedly go up because of the settlement. In an unusual element of the settlement, Ernst & Young was released from all current and any potential government claims for work it performed for any bank or thrift that failed up until Sept. 22, 1992, the firm said. The Ernst & Young audit failures charged by the federal banking regulators included allowing thrifts to recognize income by improperly accounting for loan losses, failure to check out fee income derived from sham transactions and failure to conduct audits in accordance with generally accepted accounting standards. FDIC General Counsel Alfred J.T. Byrne said the settlement was important because it showed banking regulators could win settlements in S&L and bank failures without resorting to lengthy and expensive litigation. He said the FDIC and the RTC had estimated it would cost at least $150 million to pursue the Ernst & Young claims in court. The specter of government litigation from the S&L crisis has become a fact of life for many professional firms, including law firms, auditors and appraisers. Eugene M. Freedman, chairman of rival accounting firm Coopers & Lybrand, said yesterday that while he was not familiar with the details of the Ernst & Young suit, "it is a sad reflection of American litigation that the partners of a fine professional firm had to live under a threat of this nature." ****BOX CUTTING A DEAL Highlights of Ernst & Young's settlement with the government on charges the firm mishandled audits of S&Ls that failed. * Cash payments: $400 million cash payment - $271.8 million to the Federal Deposit Insurance Corp. and $128.2 to Resolution Trust Corp. * Cease-and-desist order: Mandating additional training, more internal and external work reviews, and compliance with professional standards in high-risk areas for Ernst & Young auditors. * Banishments: One current and two former Ernst & Young partners banned from working for federally insured banks and thrifts. * Corrections: Six current and one former Ernst & Young partner agree to additional training and to take responsibility for personal review and approval of signed audits. Sources: Federal Deposit Insurance Corp., Office of Thrift Supervision, Resolution Trust Corp. This article is copyright 1992 The Washington Times. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM