The nation's largest accounting firm could be banned from doing business in California because of its audit work for Charles H. Keating Jr.'s Lincoln Savings.
Karen J. Scott, executive officer of the state Board of Accountancy, asked the panel to bar Ernst & Young from doing audits in California.A panel review concluded the company's audits of Lincoln and its parent, American Continental Corp., were "grossly negligent," according to a board complaint filed last month.
Scott's Nov. 16 request and the complaint were disclosed this week.
Steve Miller, an attorney for Ernst & Young, said the company stands by its audit and will contest the case at hearings before the board.
Experts say Lincoln's collapse will cost taxpayers $2 billion, the biggest thrift failure ever. Investigations have focused on how the S&L's finances could have been allowed to deteriorate so badly before it was seized in 1989.
A year before the seizure, Ernst & Young's predecessor company, Arthur Young & Co., issued an unqualified opinion that Lincoln's upbeat financial statements for 1987 "fairly represented" its financial condition.
A month later, the chief Arthur Young partner on the account was hired by American Continental, which tripled his salary.
The board can clear Ernst & Young or impose probation, temporary suspension or a permanent ban, said Deputy Attorney General Michael Granen, who is handling the case for the board.
Central to the case are eight Arizona desert land deals traded by Lincoln. The accounting board contends the deals shouldn't have qualified as profits because the buyers and sellers were related through complex business ties.
Ernst & Young also is the target of a negligence lawsuit filed in June by state Attorney General John Van de Kamp. The lawsuit seeks to recover the losses of investors who purchased $250 million in now-worthless American Continental "junk bonds" at Lincoln branches.
"If investors had known the truth, no one would have invested a dime in these bonds," Van de Kamp said in announcing the lawsuit. "But with Arthur Young standing behind them, their bonds sold easily."
Eugene R. Erbstoesser, Ernst & Young's associate general counsel, questioned the timing of the attempt to revoke the firm's license. He speculated the attorney general could be trying to pressure the company to settle the earlier lawsuit.
"I believe this whole thing is totally unnecessary," Erbstoesser said. "All of this is just making the firm's resolve more determined to clear its name."