BANKING/FINANCE

OTS Probe: Ernst & Young, the world’s largest accounting firm, may become the biggest accounting target in the scandalized thrift industry.

One of its predecessor firms, Arthur Young & Co., made thrift accounting a specialty in the 1980s as it represented beleaguered savings and loans.

The Office of Thrift Supervision, the nation’s thrift regulator, estimates that Ernst & Young or Arthur Young audited about one-third of the 690 financial institutions that have failed.

Ernst & Young is a major defendant in lawsuits stemming from the 1989 failure of Lincoln Savings & Loan in Irvine, the nation’s largest thrift disaster to date. Ernst & Young has denied any wrongdoing.

On Tuesday, a federal judge in Washington ordered Ernst & Young to turn over nearly a million documents relating to work it did for Lincoln and 22 other troubled S&Ls.;

The OTS, which slapped an order on a major New York law firm Monday demanding $275 million for losses at Lincoln, wants the documents because it believes accounting firms have been responsible for many abuses that caused the thrift industry debacle.