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Lehman Brothers Scandal
Transcript of Lehman Brothers Scandal
What is an Accounting fraud?
Anytime money is stolen or hidden by an employee.
Over-recording sales revenue or under-recording expenses.
Avoiding disclosure of illegal accounting activities.
Who are the Lehman Brothers ?
The Lehman Brothers was founded in 1850. From then on, the firm was a leader in global finances.
They had headquarters in New York, London, and Tokyo as well as a network of offices all over the world.
They were a global financial services firm.
Who are the Lehman Brothers? continued...
The Lehman Brothers, prior to 2008 was the fourth largest investment bank in the United States.
They focused on serving the financial needs of corporations, governments, municipalities, and high net-worth individuals.
High net-worth individual:
An individual whose assets exceed his/her liabilities in value by a large figure.
Lehman Brothers' Scandal Summary
$50 billion in loans
by placing them under assets as sales.
They did this so the
capital of the company increases and the liabilities decrease,
allowing the company to look less dependent on loans then it truly was.
They did this to trick investors.
There auditor, Ernst & Young (company) was able to manipulate the books by using “Repo 105”.
An accounting trick in which a company classifies a short-term loan as a sale and subsequently uses the cash proceeds from said sale to reduce its liabilities.
Description of the Scandal
Lehman used accounting gimmickry to mask its shaky finances.
What was the scandal, when did it happen?
In 2003 and 2004, with the U.S. housing boom well under way.
housing boom is a temporary condition caused by unjustified speculation in the housing market that leads to a rapid increase in real estate prices.
Who was involved?
The demise of the company was the cumulative effect of a number of missteps taken by several individuals and groups.
These missteps and offences can be seen as:
Lies told by Chief Executive Officer Richard Fuld; concealment endorsed by Chief Financial Officer Erin Callan; and negligence on behalf of Ernst & Young.
Why did they do it?
Lehman shares fell as much as
on concern it would be the
next Wall Street firm to fail.
Who got affected?
This was the
in the entire world, so basically everyone got affected.
When Lehman Brothers collapsed,
26,000 employees lost their jobs
millions of investors lost all or almost all of their money
, triggering a chain reaction that produced the worst financial crisis and economic downturn in 70 years.
What Financial statements were affected? What IFRS Rules were violated?
Lehman misused an accounting trick called Repo 105 to temporarily remove the
$50 billion from its ledgers
to make it look as though it was reducing its dependency on borrowed money and was drawing down its debt.
never told investors or regulators about it.
Repo 105 is an aggressive and deceitful accounting off-balance sheet device.
The continuing Concern Concept:
This states that investors have to assume that a business will continue to operate until it says otherwise.
The Principle of Conservatism:
Which states that accounting for a business should be fair and reasonable, and nothing should be over or understated.
Accounting firm Ernst & Young was
sued by New York Supreme Court
because of the claims that it helped hide Lehman Brothers' financial predicaments.
The fees that that Ernst & Young obtained from 2001 to 2008 as Lehman's outside auditor was the fees that he lawsuit solicited for, which was
more than $150 million.
The co-operated fraud consisted of the withdrawal of tens of billion dollars from its balance sheet.
This generated an incorrect impression of the Lehman’s
How they hid it
Lehman used what is known as window dressing to hide its reliance on leverage, or borrowed money.
Lehman’s superior executives, and the bank’s accountants at
Ernst & Young, were aware of the rearrangements.
Repo 105 involved transactions that secretly removed billions of dollars off Lehman’s books
In its Repo 105 transactions, Lehman
used assertive accounting
: it seemed to have structured transactions; they sold securities at the end of the quarter, and planned to buy them back again days after.
Who did this scandal effect
entire global economy
was affected by the fall of the Lehman Brothers.
The Lehman Brother bankruptcy was
largest corporate bankruptcy in U.S. history.
Many workers were laid off.
26 thousand workers became unemployed and millions of investors lost all of the money they invested into the Lehman Brothers.
How were financial statements affected
The Lehman Brothers conducted a repo transaction. However, instead of trading an asset worth the cash amount, they
traded a toxic asset.
Also, the repo was
not recorded as a loan but instead as a sale.
Repo (Repurchase Agreement):
One company transfers an asset to another company for short- term cash. Borrower will pay back the cash and take back the asset on a specific date. (usually within week or so).
A financial asset that’s value has fallen significantly and may fall further, especially as the market for them has frozen (no functioning market).
Were any employees held accountable?
have been pressed against the
as of today.
The Lehman Brothers are still
under investigation and analysis.
Ernst & Young was sued by New York Supreme
Court because they are believed to be responsible for hiding the Lehman Brothers' financial health.
What happened to the Lehman Brothers
The Lehman Brothers are still a corporation today with roughly
working full time all over the world.
tens of billions in assets
that they are attempting to liquidate in order to pay back their creditors.
Creditors want to know how much they will receive from the remaining assets of the Lehman Brothers; this has resulted in
numerous multi-billion dollar legal fights.
However the Lehman Brothers will eventually no longer exist after all of their assets have been liquidated.
Screen applicants thoroughly before hiring them.
Implement internal controls to reduce fraud risk.
Creating an anonymous theft reporting system.
• Work with a CPA.
• Consider annual audits.
• Financial Statement Check.
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Lehman Brothers' employees leaving the Lehman brothers' London office on the day it collapsed in September 15, 2008
Richard Flud. CEO of Lehman Brothers