Accounting Regulators End Turf Battle

Accounting Regulators End Turf Battle

Accounting regulators in the United States and Britain have resolved a prolonged turf dispute that allowed questionable accounting methods at Lehman Brothers to go undetected.

The Public Company Accounting Oversight Board and its British counterpart, the Professional Oversight Board, agreed on Monday to cooperate as they oversee accounting firms that audit public companies in both countries.

The agreement will open the door for the American oversight board to resume inspections of some 60 British-based accounting firms. The board was allowed to inspect the firms from 2005 to 2008, but has been handcuffed ever since.

Both regulators “are committed to investor protection and to having a strong working relationship with each other,” the American board’s acting chairman, Daniel L. Goelzer, said in a statement, adding that he is “pleased that we have overcome the obstacles that have prevented” the inspections.

The obstacles included an American law that prohibited the accounting board from sharing confidential information with regulators in Britain. The British regulators reacted in kind.

The recent Dodd-Frank financial regulatory law amended the accounting rules to permit exchanging information with overseas regulators, paving the way for Monday’s agreement.

“If we’re going to withhold information from other countries, we can’t expect them to share details with us,” said Frederick W. Lindahl, an associate professor of accountancy at George Washington University. “Dodd-Frank put us in a position to say sure, take a look.”

In a statement, Rhonda Schnare, the American accounting board’s director for international affairs, said she was working out similar agreements with accounting regulators in several other countries.

China and Switzerland are among the nations that have banned the American board from conducting inspections.

Such regulatory blackouts can allow potential accounting scandals to escape notice.

For instance, the American board was unaware that Lehman Brothers was using what some have deemed an accounting gimmick to stay afloat in 2008. Lehman used the British division of accounting giant Ernst & Young to review the transactions, known as Repo 105. The repo transactions, short for repurchase agreements, helped Lehman temporarily hide billions of dollars in assets off its balance sheet.

Lehman executed the transactions in Britain because it was unclear whether they were legal under United States law.

In December, Andrew M. Cuomo, who was then New York’s attorney general, sued Ernst & Young, accusing the firm of helping Lehman Brothers “engage in a massive accounting fraud.” Ernst & Young has said it stands by its audits.

The American accounting board, which is overseen by the Securities and Exchange Commission, is an independent panel created by Congress after the scandals at Enron and WorldCom. Before that, the industry policed itself. The board inspects accounting firms, writes rules and fines violators.

The S.E.C. on Friday appointed a new chairman of the accounting board: James R. Doty, a private securities lawyer and former general counsel at the S.E.C.