E&Y, PwC under UK regulatory probe over Lehman, JP Morgan audits

Britain's accounting watchdog has launched a second investigation into Ernst & Young over the manner in which it audited the failed US bank Lehman Brothers. It has also initiated a similar inquiry into PricewaterhouseCoopers' (PwC) auditing of JP Morgan.

The investigations, which are likely to intensify pressure on auditing firms in the wake of the credit crunch, will look at what the two firms told the City regulator, the Financial Services Authority (FSA), about the banks' compliance with rules on maintaining client money separately from their own funds.

The Accountancy & Actuarial Discipline Board (AADB) can impose sanctions ranging from a sharp rap on the knuckles to huge fines and revocation of registration.

The scrutiny of Ernst & Young (E&Y) by the AADB, which is part of the Financial Reporting Council (FRC) accountancy watchdog, will include the year to November 2007.

Lehman's collapse of September 2008 which was the biggest bankruptcy in US history, almost brought the global financial system to its knees and set in motion a process of regulatory reforms.

E&Y, one of the big four global auditors, has confirmed that the AADB has approached it in the matter pertaining to the reporting on client assets. It has assured full cooperation with the investigation.