Accounting Firm Settles Charges in Lincoln Case : Thrift: Ernst & Young will pay the state $1.5 million in the collapse of the Irvine-based S&L;.

The Ernst & Young accounting firm will pay the state $1.5 million to settle charges that it was grossly negligent in 1987 audits of Lincoln Savings & Loan in Irvine and its parent firm.

The settlement with the state Board of Accountancy also bars one of the accounting firm’s Los Angeles partners from performing audits for a year as part of a three-year probation. In the settlement, Ernst & Young admitted no wrongdoing.

The agreement was immediately criticized by attorneys for thousands of stock- and bondholders who lost more than $250 million in the April, 1989, collapse of Lincoln and its parent firm, American Continental Corp. of Phoenix.

“I think it’s incredible,” said Ronald Rus of Orange, one of the attorneys for bondholders. “The board exists for the benefit of the Big Six accounting firms and is reluctant to discipline its own.”

The $1.5-million fine will be used to cover the costs of the proceeding and to pay for prosecutions of other cases, state officials said. The settlement also calls for the firm to set up “substantial educational and training programs” for its partners and auditors in California for three years and to comply with other policies and procedures.

In addition, partner Francis J. O’Brien was placed on three years’ probation and barred during the first year of probation from participating in any audits. He was the regional accounting director in Los Angeles for Arthur Young & Co., one of two major firms that merged last year to form Ernst & Young.

“The fact that the state enforcement program gets benefited is little consolation to the elderly people who lost their life savings,” Rus said.

But the state’s action was aimed at discipline, not restitution, said Ira M. Landis, the board’s president. The state attorney general’s office and other agencies are seeking restitution for the bondholders.

“We believe this is a good settlement,” Landis said. “It is the largest penalty ever assessed by the board.”

Mort Meyerson, Ernst & Young’s spokesman, said: “We continue to believe that our audit was made in accordance with professional standards and that any wrongdoing was by ACC/Lincoln.”

Arthur Young’s audit of American Continental in 1987 was the primary document that the state Department of Corporations used in approving the company’s May, 1988, request to continue selling bonds to investors at Lincoln’s Southland branches.

The favorable audit showed a healthy, profitable company and S&L; unit, contradicting the state agency’s own internal analysis that questioned American Continental’s ability to repay the bonds.

The state Board of Accountancy, though, accused the accounting firm in December of gross negligence in issuing an unqualified opinion--the highest--about the company’s financial condition.

The board accused O’Brien of improperly recognizing $62 million in profits on eight real estate transactions. Without that, the board alleged, American Continental would have posted a $36-million pretax loss.

The board, which started investigating the accounting giant 14 months ago, had sought disciplinary actions ranging up to revocation or suspension of the California licenses of the firm and its accountants who worked on the Lincoln audits.

It determined, though, that O’Brien was the only auditor in California who did substantial work on Lincoln. The firm’s work was headed by its Phoenix office; the state board’s authority covers accountants and firms only in this state.