Ernst & Young ordered back to court for CBI fraud

By Emily Chasan

NEW YORK, June 17 (Reuters) - Accounting firm Ernst & Young [ERNY.UL] will be headed back to court to face allegations that it failed to detect fraud at wholesale drug distributor CBI Holding Co more than 15 years ago.

In a ruling on Monday, a U.S. appeals court in New York reversed a lower court's decision that the company could not sue Ernst & Young for its own fraud.

CBI filed for bankruptcy in 1994 after the company's managers schemed to manipulate inventory figures to inflate its chief executive's bonus and deceive lenders about its true financial condition, according to court papers. Ernst & Young had given the company clean audit opinions in 1992 and 1993.

In April 2000, the bankruptcy court had ordered Ernst & Young to pay CBI's creditors about $70 million in damages, concluding the accounting firm had departed from the accepted standards of practice for auditors. Then, a U.S. District Judge reversed that decision in favor of Ernst & Young in 2004.

But the three-judge panel on the U.S. appeals court concluded this week that the company could sue Ernst & Young and the dispute should be sent back to the lower court for further proceedings.

Ernst & Young spokesman Charlie Perkins declined to comment on the decision. (Editing by Braden Reddall)