US prosecutors are poised to file civil fraud charges against Ernst & Young for its alleged role in the collapse of Lehman Brothers, saying the accounting firm stood by while the investment bank misled investors about its financial health, according to a report in the media today. 

Attributing to people familiar with the matter, The Wall Street Journal reported that New York prosecutors are poised to file civil fraud charges against Ernst & Young (E&Y) for its alleged role in the collapse of Lehman Brothers. 

The report noted that State Attorney General Andrew Cuomo - who was recently elected as the Governor of the state of New York, but will only assume office on January 1, 2011 - is close to filing the suit, which would mark the first time a major accounting firm is being targetted for its role in the financial crisis. 

"The suit stems from transactions Lehman allegedly carried out to make its risk appear lower than it actually was," the report pointed out. 

Lehman Brothers was one of E&Y's biggest clients and the accounting firm earned about $100 million in fees for its audit work between 2001 and 2008, it added. 

The suit could be filed as early as this week, the daily said, adding it is part of a broader investigation into whether some banks misled investors by removing debt from their balance sheets before they reported their financial results to mask their actual risks. 

According to the publication, the state may seek to impose fines and other penalties on E&Y. 

Cuomo's office has sought documents and information from several firms, including Bank of America Corp, which earlier this year disclosed six transactions that were wrongly classified, the report noted. 

The report said that there is a possibility that E&Y will try to settle out-of-court before any suit is filed. 

E&Y and Lehman Brothers estate declined to comment on the issue. Civil fraud liability for auditors: prosecutors prepare charges against accounting firm over Lehman risk concealment. Prosecutors are preparing civil fraud allegations against an accounting firm for allegedly enabling Lehman Brothers to misstate its financial condition by allowing transactions that reduced reported risk; the action, part of a broader probe into balance-sheet debt removals to mask exposure, may seek fines and other penalties and could be filed imminently though an out of court settlement remains possible.