The Public Company Accounting Oversight Board (PCAOB news) really had little choice but to open an investigation of Ernst & Young (Ernst & Young news) and its role in the failure of Lehman Brothers (Lehman Brothers news). It joins the Securities and Exchange Commission (SEC news) in taking a look at how the firm handled the tricky Repo 105 transactions that Lehman Brothers used to dress up its balance sheet. Congress will also perhaps haul the firm in for a dressing down. 

The audit firm has denied any wrong doing, and has mounted a defense, but the future remains murky. If the PCAOB decides to bring a case against Ernst & Young, it would be the highest-profile enforcement action since it began bringing cases in 2005, notes FOX Business News. The news outlet also notes the bankruptcy examiner's report by Anton Valukas "will certainly be the board's road map." Many have suggested that the widely covered report could support criminal claims against Ernst & Young for not providing disclosure about Lehman's use of Repo 105 or lack of disclosure. 

The PCAOB also issued a warning to auditors to be on the lookout for unusual deals. "Significant unusual transactions, especially those close to period end that pose difficult 'substance over form' questions can provide opportunities for companies to engage in fraudulent financial reporting," the PCAOB said in the alert. That follows an alert about improving communications between the board and the audit committee. Both seemed to flow from the Ernst & Young-Lehman Brothers situation. 

So how bad is it for Ernst & Young? Well, some people are mentioning the firm in the same breath as Arthur Andersen (Arthur Andersen news), which was given the death penalty after the Enron crisis. I doubt that regulators will impose such a penalty, but the real harm may come from civil litigation. The suits have already started, and will likely intensify. We'll just have to wait and see. 

And just for the record, Ernst & Young is not the only "big 4" firm that is facing massive allegations of wrong doing. The Arthur Andersen references may well be applied to all of them, though I doubt any will be put to death. You can, however, count on an explosion of civil suits, similar to what will befall Ernst & Young. KPMG (KPMG news) may potentially be liable for its role in the Allied Capital fiasco. KPMG has the same liability over its role in the New Century failure--the case that has stoked the most analogies to Enron. And PricewaterhouseCoopers (PwC news) has its own crisis over the Satyam blow-up. - Jim