Auditor Raps Regulators for Releasing Lincoln Data

One of the nation’s largest accounting firms denounced federal savings and loan regulators Friday for releasing a confidential report that criticized its audits of now-bankrupt American Continental Corp. and its Lincoln Savings & Loan unit.

Arthur Young & Co. stands by its 1986 and 1987 audits of the Phoenix company and its Irvine-based subsidiary, said Eugene Erbstoesser, the firm’s associate general counsel.

The accounting firm, which recently merged with Ernst & Whinney and was renamed Ernst & Young, came under fire in a report released Thursday by the Federal Home Loan Bank Board, which seized Lincoln on April 14. The bank board put the S&L; into receivership on Thursday, saying it had become insolvent. The regulators used the report, in part, to support that move.

Typically Confidential

The report, prepared for regulators as an independent audit by the accounting firm of Kenneth Leventhal & Co., claimed that more than half the income Lincoln recorded since American Continental bought it in 1984 was manufactured through “accounting gimmickry.” Leventhal claimed that it had seldom seen “a more egregious example” of misapplied accounting standards.

While condemning Lincoln’s accounting methods, it did not specifically name Arthur Young or two other accounting firms that worked on the books of the company and the S&L; since 1984. Internal reports for government agencies are typically confidential, and federal law prohibits the agencies from divulging confidential information. In the past, the bank board has publicly disclosed similar information in certain cases.

Erbstoesser contends that the document, a review of 15 major real estate transactions, was supposed to remain confidential.

“Arthur Young questions the purpose of leaking this document,” Erbstoesser said. “The bank board is embarked on a campaign of innuendo and rumor to bring in through the back door what it can’t prove up front.”

Class-Action Suits

He said the accounting firm has “not ruled out” the possibility of filing a criminal complaint or a civil lawsuit against regulators.

Arthur Young and two other accounting firms, Arthur Andersen & Co. and Touche Ross & Co., are named, along with lawyers and American Continental directors and officers, in a dozen class-action lawsuits filed by American Continental bondholders, who stand to lose $200 million they invested through Lincoln’s 29 Southern California branches.

Arthur Andersen and Touche Ross spokesmen said they were not the auditors for American Continental on the 15 transactions reviewed by Leventhal.