Ernst & Young faces state board ruling by end of year in Lincoln Savings license case.

Ernst & Young faces state board ruling by end of year in Lincoln Savings license case

The State Board of Accountancy should decide before the end of this year whether the giant accounting firm Ernst & Young will lose its license to practice in California because of its dealings with the parent company of failed Lincoln Savings & Loan, said Carol Sigmann, newly appointed board executive director.

In addition, it appears that all partners of Ernst & Whinney, which merged with Arthur Young & Co. in July 1989, could be held responsible for any court judgment arising out of a $250 million lawsuit filed by the state attorney general's office, said Ernst & Young spokesman Mort Meyerson. Both the attorney general and the state board of accountancy's cases center on the actions of an Arthur Young & Co. partner in 1988.

Sigmann said that she plans to set the first hearing date this month. "It's something I want to move on as quickly as I can," she said.

Ernst & Young is being sued by the state Attorney General's office for allegedly defrauding California residents of $250 million - the amount they paid for American Continential Corp. debentures, according to court documents.

The suit also asks that Ernst & Young be ordered to pay all investors their money back plus additional civil penalties, court costs and other relief the court deems proper. Arguments are currently in progress on whether the case should be tried in a state court in Los Angeles or a federal court in Arizona.

Both cases center on Los Angeles partner Francis Joseph O'Brien, who as a partner at Arthur Young & Co. provided financial statements about American Continental Corp. that were used in the sale of about $200 million in unsecured bonds to California residents. The bonds later turned out to be worthless, according to State Board of Accountancy documents.

Arthur Young & Co merged with Ernest & Whinney in July 1989 to form Ernst & Young.

Deputy Attorney General James Schwartz said that Ernst & Young is a partnership and "in a partnership, each individual partner is responsible for the (amount of any court) judgment." Schwartz said that he did not know if the merger agreement between Ernest & Whinney and Arthur Young & Co. stipulated that Ernst & Whinney partners would not be responsible for possible damages in the suit.

Company spokesman Meyerson said he believes that all of the partners could be held responsible to pay any court judgment arising from the case. "We're one firm, defending it as a firm, not as Arthur Young & Company," Meyerson said.

Meyerson declined to answer any other questions about the case, saying "we decided we're probably better off not talking about it."

Samuel Bell, managing partner of Ernst & Young in Los Angeles, also declined to answer any questions about the cases. Bell, however said that the partner named in the suits, O'Brien, still worked at the Los Angeles office.

O'Brien and attorneys at the law firm Heller Ehrman White & McAuliffe, which represents the CPA firm, did not return telephone calls.

Both cases allegations center on O'Brien's accounting of real estate transactions in Arizona. O'Brien's audit concluded that American Continental Corp. had a pre-tax earning of $26 million, when it should have concluded the corporation had a pre-tax loss of $36 million for the fiscal year ending in 1987, according to court documents.

Sigmann declined to discuss the allegations in the case and would not comment on whether Ernst & Young attorneys were attempting to work out a pre-trial settlement with the State Board of Accountancy.

Sigmann said she is working to get a date for an administrative judge to hear the state board's case against the firm. After the judge made a ruling the State Board of Accountancy could follow the judge's ruling or issue its own ruling, she said.

The Board could take a number of actions, including revoking Ernst & Young's license, suspending the license or placing the firm on probation, she said. The board's suit also asks that O'Brien's CPA license be suspended.

The Board of Accountancy is part of the state's Department of Consumer Affairs and is charged with protecting the consumers of California from accountants fraudulent practices, she said. Sigmann, who began the job as executive director four months ago, said she took the job because of the board's strong stance toward protecting the state consumers.

Sigmann said that the Ernst & Young case may be the first of many more major prosecutions the board plans.

"This board is going to be providing a great deal of leadership in the state and even in the nation, in the area of accountability of CPAs," Sigmann said. Sigmann, formerly was the executive officer of the State Board of Podiatric Medicine, prosecuting podiatrists accused of crippling patients, operating while drunk or under the influence of drugs and commiting insurance fraud.

PHOTO : Results: In question are reports done for a company owned by Charles Keating 

PHOTO : Keating: Lincoln bonds prompt hearing