* Board opens second Lehman-related probe into E&Y conduct
* E&Y says will cooperate fully
* PWC also faces probe in separate, non-Lehman related case
* PWC probe follows FSA fining of J.P. Morgan bank
By Huw Jones
LONDON, Oct 4 (Reuters) - Britain's accounting watchdog opened a second investigation into auditor Ernst & Young on Monday over its auditing of failed U.S. bank Lehman Brothers.
The probe will examine what E&Y told UK regulators about how Lehman Brothers was complying with client asset protection rules.
"The Accountancy and Actuarial Discipline Board has begun an investigation under its accountancy scheme into the conduct of the Ernst & Young LLP, auditors to Lehman Brothers International (Europe)," the board said in a statement.
The board has powers to impose sanctions ranging from a reprimand to unlimited fines and withdrawal of registration to operate.
The new probe will look at what E&Y reported to the Financial Services Authority about Lehman's compliance with the FSA's client asset rules, which govern the protection of client money.
The probe by the AADB, which is part of the Financial Reporting Council (FRC), a regulator, covers the year that ended Nov. 30, 2007. The board it opened its investigation after the FSA raised some issues.
Lehman collapsed in September 2008, bringing the global financial system to its knees and leading to a round of sweeping regulatory reforms.
E&Y, one of the "Big Four" global auditors, confirmed it has been approached by the AADB in relation to reporting on client assets. "We will cooperate fully with the investigation," it said in a statement.
The board asked E&Y in March to explain how it audited Lehman's books before it went bust in 2008, and opened a formal investigation in June.
"We won't have the outcome for some time," an AADB spokeswoman said on Monday of the June probe.
That investigation followed a U.S. examiner's report which said there was enough evidence to support a possible claim that E&Y had been "negligent" and that Lehman could pursue claims against the firm for "professional malpractice".
The U.S. report focused on the use of a so-called "Repo 105", an accounting technique that helped to temporarily lower the struggling bank's apparent leverage by $50 billion.
Separately the AADB opened an investigation on Monday into what PricewaterhouseCoopers, another of the Big Four auditors, told the FSA of the way in which U.S. bank J.P. Morgan complied with client asset protection rules.
The probe will look at the period between Dec. 31 2001 and Dec. 31 2008 and stems from the FSA's action in fining J.P.Morgan 33.32 million pounds in June for failing to protect billions of dollars of client money over almost seven years.