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Lehman Brothers Audit Failure

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Wandi Yang

on 13 February 2015

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Transcript of Lehman Brothers Audit Failure

About Lehman Brothers (cont.)
Group 7 Alex Kou/ Jeff Wang/ Di Wu/ Wandi Yang
CEO: Richard "Dick" Severin Fuld, Jr.
Started with LB in 1969
Nicknamed the "Gorilla" of Wall Street
Annual Salary: $500 million
Lehman Brothers Audit Failure

Lehman's Quarterly Profits
Repo 105
Suggested Auditing Procedures
Review the volume or timing of Repo 105 transactions to check the validity

Auditor's Failure
Suggested Auditing Procedures
Consequences -Management

Further investigate the letter from Matthew Lee and disclose it to the board’s audit committee.

E&Y fully aware of the Repo 105 policies and transactions.
Helped Lehman portray the Repo 105 transactions as sales
Did not disclose complex relationship to Hudson Castle

About Lehman Brothers
Auditor's Failure
Matthew Lee
Former Lehman senior vice president
E&Y decided to keep silent after several discussions with the top executives from Lehman.

Global financial services firm
Founded in 1850
26,200 Employees
4th largest investment bank in the US
$3.1 billion revenues in 2007
Auditors have a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement
Stock price dropped by 94% from $62.19 to $3.65
Total debt: $613 Billion

Chapter 11 Bankruptcy
in September 2008
Dow Jones Index plunged 504 points
Other big name Wall Street companies: AIG, UBS, Merrill Lynch, etc.
Set off a chain of effects that lead to the melt down of the world’s financial system

CEO Dick Fuld and 12 executives received grand jury subpoenas related to the accounting fraud
Settlement: $90 million

1. Company Information
2. Accounting Fraud
3. Audit Failures
4. Consequences

Auditors at the time were Ernst & Young
Largest bankruptcy in US history
2008 --> Huge losses due to subprime mortgage crisis.
Consequences - E&Y
New York Attorney General : 4 civil charges
Former Lehman Investors: class action lawsuits
Settlement: $99 million in 2013
Accounting Rule Change
Accounting rule-maker: Financial Accounting Standards Board (FASB)
Issued: Accounting Standards Update No.2011-03
Purpose: To close the accounting loophole
New Rule: All Repos would be treated as
Required to disclose more details on collateral

There is no factual or legal basis for a claim to be brought against an auditor when the transactions at issue followed GAAP
- E&Y
Advise Lehman to present the proper disclosures with regard to their complex relationship to Hudson Castle
The evidence was sufficient to support the claims against E&Y for professional malpractice,
Be fully
in both appearance and mind
-Anton Valukas
Thank You!
"Lehman Brothers."
. Wikimedia Foundation, 21 Apr. 2014. Web.

"Repo 105 Definition | Investopedia."
. Web. 22 Apr. 2014.

Ahrens, Frank. "Lehman Brothers, The Evil Repo 105s and the Danger of Off-Balance-Sheet Deals."
The Wall Street Journal
. 13 Mar. 2010. Web. 22 Apr. 2014.

Pierre. "Lehman, E&Y, and Repo 105."
Drilling Through
. N.p., 10 Aug. 2012. Web. 28 Apr. 2014.

Fuld Fights Back
. 28 Apr. 2010. Web. 27 Apr. 2014.

Whittington, Ray, and Kurt Pany.
Principles of Auditing & Other Assurance Services
. Boston: McGraw-Hill/Irwin, 2012. Print.

Story, Louise, and Eric Dash. "Lehman Channeled Risks Through 'Alter Ego' Firm."
The New York Times
. The New York Times, 12 Apr. 2010. Web. 28 Apr. 2014.

Korkery, Michael. "Lehman Whistle-Blower's Fate: Fired."
The Wall Street Journal
. Dow Jones & Company, 15 Mar. 2010. Web. 28 Apr. 2014.

McKenna, Francine. “Lehman Troubles Not Over For Ernst & Young”
. 13 Dec. 2012. Web. 26 Apr. 2014.

Lattman, Peter. “Cuomo Sues Ernst & Young Over Lehman.” The New York Times. 21 Dec. 2010. Apr. 24 2014.

“Transfers and Servicing (Topic 860): Reconsideration for Effective Control for Repurchase Agreements.”
Financial Accounting Standards Board
. Apr. 2011. Web. 28 Apr. 2014.

Rapoport, Michael. “Leeway on Repo Rules Is Cut Back.”
The Wall Street Journal
. Dow Jones & Company, 15 Jan. 2013. Web. 28 Apr. 2014.
Full transcript