Lehman on the Brink of Bankruptcy: A Case about Aggressive Application of Accounting Standards

Dennis H. Caplan, Saurav K. Dutta, and David J. Marcinko4.

1. Review the financial data and ratios presented in Exhibit 1 for Lehman, three other financial institutions, and three other prominent companies. Analyze trends at Lehman over time. Compare Lehman to the other financial institutions. Compare the financial institutions as a group to the leading firms in other industries.

2. Lehman's senior management, internal auditors, and external auditors were alerted to the use of Repo 105 transactions by a whistleblower. The resulting investigation does not appear to have led to a serious reconsideration of the appropriateness of Lehman's accounting for these transactions. What corporate governance measures can be instituted to help prevent the issuance of misleading financial statements?

3. As noted in the New York Attorney General's Complaint against E&Y (paragraphs 43-44, p. 19), an E&Y auditor asked his senior manager about the potential impact that Lehman's Repo 105 activity could have on its reputational risk. The auditor asked whether the audit team was comparing Lehman's Repo 105 activity to Lehman's competitors, or referring to any industry publications or regulatory guidance. The auditor's concerns stemmed from E&Ys "balanced audit approach," which requires E&Y to obtain some level of understanding of the business and the industry of its audit client. Why should industry practices and competitors' actions affect audit procedures and auditor judgments?

Attachment:- Lehman Case.pdf