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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Lehman Brothers Accounting Technique used by Lehman Brothers As unraveled in the story, “Lehman’s Shell Game: Poor Risk Management”, 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. Though the firm was struck by high amounts of debt yet the accounting practices followed by the firm reflected a healthy financial condition which eventually led to the collapse of the concern. It is observed that Lehman Brothers through the use of Repo 105 and Repo 108 carried out fraudulent transactions in which the firm sold huge number of bonds and government securities on a temporary manner. The transaction helps the borrower to receive cash to which security instruments are transferred to the lender. Subsequently, the securities are returned with an excess 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 “hair cuts” or repo rates to 5 percent and 8 percent on Fixed Income and Equity securities respectively. Transactions of these natures were accounted by Lehman as “sales of securities” and the cash received was also not treated as liability. Thus, it showed inflated financial and asset position of the firm (Dutta, Kaplan & Lawson, 25; Clark).
Accounting and Ethics
There is a continual set of 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 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).
Role of an Accountant in Preventing Fraud
The accountant has diversified roles in management of frauds. Modern day accounting practices demands 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 functions through consulting bodies to track fraudulent tax practices. Accountants must relate themselves increasingly to auditory practices which would help reduce fraudulent business activities. Larger business corporations carry out internal audit practices through the system of internal auditors who are mainly the company’s accountants. In that, the accountants work as advisors to the concern that thereby helps to render potential information to the business to modify its financial and accounting systems to impart a true position. The business corporations would endeavor to strengthen its business and operational procedure according to the suggestions placed by the internal audit team. Development of the ‘Accounting Information Systems’ can be observed as a step forward in the direction of identifying business frauds through the publishing of standardized accounting information for others to follow (“Role of Accountants on the Fight against Economic Crime and Fraud”).
1. Clark, Andrew. “Lehman Brothers: Repo 105 and other accounting tricks”, 2010, December 24, 2010 from
2. Dutta, K. Saurav, Caplan, Dennis, & Raef Lawson. “Lehman’s Shell Game: Poor Risk Management”, Strategic Finance, 2010.
3. Karthik, Narayani, “Accounting Ethics”, 2010. December 24, 2010 from:
4. “Role of Accountants on the Fight against Economic Crime and Fraud”, Accountant Next Door, 2010, December 24, 2010 from: Read More
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