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Lehman Brothers - Case Study Example

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The author of this case study "Lehman Brothers" comments on the story “Lehman’s Shell Game: Poor Risk Management” in which the accounting technique used by Lehman Brothers known as the Repo 105 used fraudulent means to overvalue the firm’s financial position to the outside world…
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Lehman Brothers
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Download file to see previous pages The transaction helps the borrower to receive cash to which security instruments are transferred to the lender. Subsequently, the securities are returned with an excessive interest of around 2 percent. This excess amount is termed as “haircut”. The accounting system made credits a Payable Account on borrowing cash and debits the same on its repayment. However, the balance sheet entry maintained the securities as assets even on being transferred to their owners. Lehman Brothers increased the levels of “haircuts” or repo rates to 5 percent and 8 percent on Fixed Income and Equity securities respectively. Transactions of these natures were accounted for by Lehman as “sales of securities” and the cash received was also not treated as liability. Thus, it showed an inflated financial and asset position of the firm (Dutta, Kaplan & Lawson, 25; Clark).
There is a continual set of the relation between the systems of accounting methods practiced in companies and ethical contexts. Ethical procedure in accounting demands the preparation of true financial statements and balance sheets to reflect the true financial position of the company. The company needs to conduct the accounting operations based on the moral code of conducts and must not deviate from it. An ethical accounting system evokes an interest of the investors and other stakeholders of the firm and thus helps in creating loyalty (Karthik).
The accountant has diversified roles in the management of frauds. Modern-day accounting practices demand the increasing roles of an accountant as an auditor in the financial firm. The accountants are getting trained on conducting professional audits so as to track the fraudulent practices quite easily. Moreover, the modern accountants also function through consulting bodies to track fraudulent tax practices. ...Download file to see next pagesRead More
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