Bernie Madoff, the New York Ponzi scheme master who is now in jail, is generally said to be the biggest financial criminal in the history of the US.

But at an estimated $US60 billion or so, his con is insignificant compared to the $US138 billion con pulled by Lehman Brothers and some of its senior managers, in the nine months from the last quarter of 2007 to the June quarter of 2008.

This was the total of three separate periods of falsifying the company's accounts at the end of those three quarters to make it look as though the bank was in better shape than it really was. It wasn't so much a shell game, just outright misleading and a falsifying of the company's accounts, according to the report of a bankruptcy court examiner charged with looking at the failure of Lehman Brothers.

The court-appointed examiner fingered Lehman Brothers executives and its auditor for playing a major part in the collapse that unleashed the worst of the financial crisis from September 2008 onwards.

The examiner's full report blows a hole in claims that there has been a clean-up of corporate activity in the wake of the Enron scandal a decade ago through the introduction of the Sarbanes Oxley legislation and its tougher rules for auditors, boards, senior managers and accounting rules.

That was the thinking, now the scandalous behavior of senior management, the auditors and others at Lehman Brothers brings that all into question. It appears that some board members were hoodwinked and that the briefing notes and documents for the quarterly accounts were drawn up so as to be misleading for directors, regulators, analysts and investors.

It is Enron, Refco, WorldCom and a host of other scandals (plus the ones that got away) reprised and expanded into a gigantic mess that was large enough to take the world to the brink of another depression.

You'd think there would be a clamour for the US Congress to do something: there has been, they have done nothing but talk, hold inquiries that have been grandstanding PR events for themselves (and, as the examiner's report shows, completely and utterly missed the mark when looking at Lehman's failure).

As the New York Times said in a weekend editorial:

"Of course, many colossal bankruptcies involve bad accounting. But a new report on the Lehman collapse, released last week would leave anyone dumbstruck by the firm's audacity - and reminded of the crying need for adult supervision of Wall Street."

The 2200-page report was written by Anton R. Valukas, a former federal prosecutor who was appointed by the Justice Department as an examiner for the Lehman bankruptcy case. According to the report, Lehman engaged in transactions that let it temporarily shift troubled assets off its books , reduced its leverage (or gearing) and also understated the amount of money it owed.

"Surely those whose job it is to analyse and supervise were alarmed, weren't they? asked the New York Times. "According to the report, rating agencies, government regulators and Lehman's board of directors had no clue about the gimmicks.

"The result is that we were all blindsided. And we could be blindsided again. Congress is not even close to passing meaningful regulatory reform. The surviving banks have only gotten bigger and more politically powerful. If the Valukas report is not a wake-up call, what would be?"

Good questions, but depressing. In the wake of the Enron scandal, the US Congress passed the Sarbanes Oxley Act, which was supposed to, among a host of things, toughen accounting laws and corporate oversight. Clearly it didn't, as the Lehman, Bear Stearns and a host of other failures and near misses (Bank of America, Citigroup, etc) are testimony to. The trillions of dollars in lost value, bank failures and outright cons such as Madoff and Lehman Brothers are testimony to the fact that more legislation doesn't mean better regulation.

The American public is outraged: The report on Friday in the New York Times was the most popular story in the site and after 307 comments in 24 hours on Friday, the site's administrators were forced to stop taking readers' comments. "Comments are no longer being accepted," a note on the page explains.

Lehman Brothers used accounting gimmicks to hide its weakness in the months before its bankruptcy, especially one called Repo 105, which came to cover two complex transactions that shuffled assets off the bank's balance sheets at the end of the three quarters before its collapse in September 2008. That lowered its leverage at a time when it was under pressure to do so.

There were a total of $US138 billion of these Repos 105s in those nine months, the last, at the end of the second quarter of 2008, saw $US50.38 billion parked off balance sheet, with the cash raised to cut debt temporarily. It was then reversed a few days after the end of the quarter.

Certainly the public's desire for greater accountability is there, but not in Washington, especially among the hundreds of Congressmen and senators, many of whom have taken campaign contributions from banks, other finance companies, property groups, accounting and legal lobbies and a host of other bloodsuckers or gotten loans from some of the worst offenders, as senior Democrat and Republican Senators did.

The examiner's report through millions of emails and documents shows that senior Lehman executives, as well as the bank's accountants at Ernst & Young, were aware of the moves.

The core of the whole shoddy structure was the use of what's called repos, or repurchase deals. They are normal everyday financing in markets around the world (our Reserve Bank uses them) but the version used by Lehman (Repos 105 and 108, all called repos 105) involved a terrible masquerade, all signed off and approved under UK law by leading London law firm called Linklaters.

"Unbeknownst to the investing public, rating agencies, government regulators, and Lehman's board of directors, Lehman reverse engineered the firm's net leverage ratio for public consumption,"  Valukas wrote.

The effect of the accounting was to artificially and temporarily lower the firm's debt levels to hit certain targets, making the firm look healthier than it really was.

Lehman used the cash raised from temporarily selling the assets to another party to cut debts. Normally a Repo is done to raise cash and the loan is counted as a liability.

Lehman didn't do that, so it got a benefit on both sides of its balance sheet; the debt was lower and the assets were higher, thereby cutting what's known as its leverage at the end of each quarter (from 2001 onwards, it seems, and heavily in 2007 and 2008). That helped it improve its image and financial standing on Wall Street, allowed it to continue in business by doing business with other banks, the Fed and ordinary investors.

The examiner said Repo 105 transactions used a clause in accounting rules to classify repos as sales, even though the firm was still obliged to repurchase the assets at a later date. That meant the assets disappeared from the balance sheet, and it could use the cash it received to temporarily pay down other liabilities. This made Lehman look less leveraged than it actually was.

It was able to do this and book the repos as "sales" and not financing transactions because of a legal opinion from the blue-blooded Linklaters.

Lehman turned to them because no US law firm would provide a favourable legal opinion that would enable the deals to be done in America. So the Repos were done via Lehman's UK office and European offices.

Linklaters say they have done nothing wrong, but UK commentators point out there is now a problem for the firm because it has been advising the receivers of Lehman's UK and European business (which have been a financial and legal nightmare for Pricewaterhouse).

There was no declaration by Linklaters that they had provided legal advice to Lehman in what has turned out to be such important and sensitive financial deals and seem to have kept Lehman going for longer and out of the gaze of regulators on both sides of the Atlantic.

A truce picture of its financial position at the end of the three quarters in question showed a slower than wanted improvement in leverage, which would have triggered calls for the bank to do more and a possible refusal by some other banks to do business with Lehman. That would have ended the whole charade. That is what happened in September , 2008, thereby causing Lehman to fail.

Auditor, Ernest and Young has defended itself in statements, as the New York Times reported:

"An Ernst & Young spokesman said on Thursday that the firm stood by its work for 2007, the last year it conducted an audit of Lehman's financial results.

"But Lynn E. Turner, a former chief accountant for the SEC, accused Ernst & Young of abdicating ts responsibility to the audit committee of Lehman's board by not presenting the concerns.

"This is pretty aggressive and pretty abusive. I don't know how under GAAP this follows the rules whatsoever," he said, referring to Generally Accepted Accounting Principles.

"That reeks of an auditor who, rather than being really truly independent, is beholden to management," he said, adding that the SEC and the Justice Department should follow up on Valukas's findings."

No one is saying it, yet, but some in the markets with memories remember how Arthur Andersen was destroyed by its role in the Enron collapse, and wonder if the global accounting industry, now down to just four big world scale firms, might be about to take another whack by losing a player.

Section 302 of the Sarbanes‐Oxley Act of 2002  directed the SEC to adopt rules that require an issuer's principal executive and financial officers to certify information contained in the issuer's quarterly and annual reports.

The examiner says in his report that The Sarbanes‐Oxley certification "is not limited to a representation that the financial statements and other financial information have been presented in accordance with 'generally accepted accounting principles'." Id. at 57,279. Rather, a "fair presentation of an issuer's financial condition, results of operations and cash flows encompasses the selection of appropriate accounting policies, proper application of appropriate accounting policies, disclosure of financial information that is informative and reasonably reflects the underlying transactions and events and the inclusion of any additional disclosure necessary to provide investors with a materially accurate and complete picture of an issuer's financial condition, results of operations and cash flows." (his emphasis).

Seems rather clear. But Dick Fuld, the CEO and chairman of Lehman, seems to be claiming the dumb CEO chairman defence. His lawyer says he didn't know and wasn't told. Under Sarbanes Oxley, that is no longer a defence.

Fuld was "at least grossly negligent", the report states. Not so, said his lawyer, Fuld "did not know what those transactions were - he didn't structure or negotiate them, nor was he aware of their accounting treatment", she told the US media.

And yet the report is full of statements from senior executives who said they informed Fuld at meetings or in briefings.

And if he didn't know, as the lawyer says, what was he doing earning more than $US20 million a year and more at Lehman and getting tens of millions of dollars worth of shares a year? That's as much a con as the bigger one the bank pulled on its investors, employees, regulators, and the US and world economies.

And, finally Bloomberg reported this morning on a conference call on June 16,  2008, four days after demoting Erin Callan (whose legal representatives won't comment) where Fuld said:

"I am the one who ultimately signs off and I'm comfortable with our valuations at the end of our second quarter.  We have always had a rigorous internal process."

Oh, dear, who will tell Dick's lawyer of that comment? The question now is which of the criticised executives does a plea bargain to protect themselves? The trouble for those mentioned is that the examiner spoke to very, very senior executives at Lehman, including Bart McDade, the chief operating officer and man in charge of reducing the balance sheet's leverage in the bank's dying days in 2008.