ERNST and Young will not face any action relating to its work with Lehman Brothers in the year before the bank’s collapse, the Financial Reporting Council ruled yesterday.

The Big Four auditor had faced claims it had been too lenient on the bank, signing off their reports into its European arm despite Lehman breaking the rules on the handling of client money.

The bank did not properly segregate and safeguard client money as specified by the Financial Services Authority’s Client Assets Sourcebook (CASS), and the FRC’s Accountancy and Actuarial Disciplinary Board (AADB) was also concerned that money relating to Lehman’s prime brokerage clients needed segregation.

Because Ernst and Young audited client money opt out arrangements, client classification and the segregation of client money after Markets in Financial Instruments Direction (MiFID) came in, the FRC wanted to investigate the firm.

But after reviewing Ernst and Young’s audit files and hard copy documentation as well as interviewing audit staff, the FRC decided not to take the case further.

“Executive counsel has decided that there is no realistic prospect that a tribunal would make an adverse finding against E&Y in the UK or members within that firm. The investigation will therefore be closed and no further action taken,” the FRC said.

Ernst and Young welcomed the decision. “This confirms our belief that the quality of our audit work met with the appropriate professional standards,” the firm said in a statement.