Lehman brothers case study audit

This is a clear indication that when leaders fail to mould subordinates, the consequences could be dire.

Indeed, a report issued by the inspector general with regard to the scandal at the institution revealed that. Download this Case Study in word format.


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  • Lehman Brothers and Repo 105.
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  • Lehman Brothers and Repo 105?

Cite This Case Study:. Related Documents:. Repurchase Agreements Encapsulated in That. Barclays Quantitative and Qualitative Research. Computerization Background and History of. The reports were unable to accurately make long-term projections putting into consideration market uncertainties and risks. This inability rendered them incapable of implementing counter strategies when the market conditions fluctuated. Their audit reports should have revealed the excessive borrowing that raised their leverage ratio above what is required by US regulations.

Their leverage ratio of was above US regulation of below The firms, however, window dressed its financial statements to deceive its stakeholders. The Repos were being used to hide its high leverage during auditing. It financed its daily operations from the repo markets and fixed income and equities. Ernst 7 Young failed to detect the timing and frequency of the repos transactions.

Preventing the Next Lehman Brothers

The audit should have been in a position to reveal if Lehman Brothers could settle its repo positions so that it could be in a position to maintain its positive relationship with its counterparties. Consequently, this information would have revealed if the firm could maintain a constant and continuous capital to finance its operations.

Excellent auditing could also have put the firm in a good position to manage its balance sheet in response to market fluctuations like the one experienced in during the financial crisis. The issue that surrounded the collapse of Lehman Brothers is the fact that from their audit, they did not anticipate risk in their heavy investments.

Organizations ought to ensure that they have a way of balancing their leverages and the balance sheet.

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The Collapse of Lehman Brothers: A Case Study

During booms, leverages should be high and low during recessions Greenlaw et al. From this analysis, it is clear that poor auditing issues were the factors behind the unexpected collapse of the firm. Following this report, the firm announced a loss during the first quarter since the issuance of the IPO. The main features of this new standard are; authorization of the communication of key audit matters KAM of listed entities, it also enables the auditors of the listed entities to decide whether or not to include KAM in their reports, it also spells out guidelines of how the auditor should determine and describe the key audit matters KAM , provides a basis to determine the circumstances under which some KAM cannot be communicated and also describes the audit documentation requirements AUASB website.

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ASA and Lehman Brothers The connection between Lehman Brothers and the development of this new accounting standard can be drawn from the collapse of the firm. This new auditing standard addressed the auditing issues that were not addressed at the time Lehman Brothers was being audited.

The loopholes that existed as a result of the poor auditing on the firm needed to be addressed, and thus the new standard was recommended. If this standard was applicable during that period of the collapse, several key audit matters would have been noted and communicated to the members of Lehman Brothers. Some of this KAM that required to be disclosed include the areas of high risk identified.

This risk could have included the looming collapse of the mortgage market. If this had been communicated, the collapse could have been avoided. Another KAM that would be required is significant events and transactions that transpired involving the firm. The repos transactions that the firm used to mask its high leverage ratios would be required to have been produced. The members of Lehman Brothers would have made better strategic investment decisions if they were made aware of the heavy repos transactions that the firm did in the investments it made during the housing boom in America.

Areas of significant management and auditor judgments should also have been communicated to assist in understanding all accounting estimates associated with the firm. The new standard would have provided useful additional information about the impending collapse. Recommendation Poor accounting that led to key auditing maters not being effectively communicated or not communicated at all. Auditing officials need to be more ethical and responsible.


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  6. Excessive use of repos, timing of transactions and misrepresentation of financial information should be eradicated. There should also be more vigilant and constant monitoring measures by regulatory bodies. If Lehman Brothers quarterly financial statements were critically evaluated, the unethical repos and balance sheet statements could have been detected and strict measures taken to avoid bankruptcy. Another important recommendation is that legal frameworks for bailing out firms in financial distress should be made available.

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    The new auditing standard has improved the way that auditing was being approached and this has made the practice to be more useful and more efficient. Regulatory bodies should be well resourced to support effective supervision and monitoring. Regulators should ensure they understand the rules for accounting, preparing and analyzing financial statements. In so doing, they will detect wrong-doings of financial institutions. McDonald, O.

    Millichamp, A. Wearden, G. De la Merced, M. Journal of Legal, Ethical and Regulatory Issues. Studies in Economics and Finance , Harris, R.

    The Lehman Brothers Scandal ()

    Greenlaw, D. Monetary Policy Forum Retrieved from: www. Related Papers. By eshetu teka.