Introduction

Audit Report of Lehman Brothers

Table of Contents

Introduction. 3

Corporate Profile of Lehman Brothers. 3

Causes of the Failure & Its Impact 3

Auditing Issues Surrounding the Collapse of Lehman Brothers. 4

Recommendation. 5

Conclusion. 5

References. 7

Introduction

In the year 2008, Lehman Brothers filed for insolvency protection in the United States. As a 4^th biggest, leading and reputed invested banking company in the industry, a number of stakeholders such as: shareholders, owners, clients, creditors, and employees did not forecast this bankruptcy. They did not projected that the leading company would file for the bankruptcy. In this research paper, a detailed discussion would be made on auditing report of Lehman Brothers. Moreover, corporate profile of the company, accounting standards, key reasons for bankruptcy would be discussed. Finally, specific recommendations would be provided to deal with the financial or bankruptcy related issues. 

Corporate Profile of Lehman Brothers

Lehman Brothers Holding Inc. was one of the biggest and leading banking and investment firms that operated its business operations & functions globally. The main business operations of the firm were related to financial service sector. It was the fourth largest financial service company in the US. The company was formed by brothers such as: Emanuel, Mayer and Henry in the year 1850. The company was established as a financial investment firm in the market that provided a range of financial and banking services including investment management, financial services, investment banking. During the time of collapse and bankruptcy, the company had more than 26000 employees. At the time of bankruptcy, there were a number of leading subsidiaries such as: Neuberger Berman Inc, Aurora Loan Services LLC, Eagle Energy Partners, Lehman Brothers Bank FSB, Crossroads Group etc. The main business of the firm was investment management & banking, private banking, equity, Treasury securities etc.

Causes of the Failure & Its Impact

Based on the auditing report of Lehman Brothers, it is found that, there are a number of reasons or factors that lead to the disaster. For instance, debt load of American households, greedy Wall Street traders, deregulation, rating agencies, Fed’s action etc. were the key caused behind the failure of Lehman Brothers. All these agents were key accountable for the financial crisis of credit and failure of the company. Moreover, The Company faced issue because it was trying to modify its accounting and financial transaction by using cosmetic accounting gimmicks (Balakrishnan, Watts, & Zuo, 2016). The executives and members of the company were continuously focused on using cosmetic accounting gimmicks at the end of each quarter in order to make its finances appear less shaky than they have. This was the major problem in the company. Along with this, it is also found that, the company was focused on using repurchase agreement that temporarily removed securities from the company’s balance sheet.

Risk: The Company had taken risk in high volume without a corresponding ability to raise cash quickly. For example, in the year, there were$639 billion in assets. It was difficult to sell such assets. The company failed to sell the assets to raise the fund and company faced cash flow issue.

Culture: According to chief risk offer of the company, the top management of the company did not paid attention on executing risk management strategies. They used high risk strategies in order to attain competitive advantages over competitors. This was the mistake done by the management of the company (De Haas, & Van Lelyveld, 2014).

Regulator Inaction: The regulators as well as Securities and Exchange Commission did not take corrective actions because before 2007, the company was taking too much risk.

The company faced the issue of bankruptcy and it lost its market share and business reputation in the global market. This Lehman’s collapse affected the world financial negatively. Moreover, the trust in the stability of the financial system was broken and a number of customers, investors, creditors faced issues and problems. Moreover, a huge number of people lost their job due to this fraud (O’connor, 2017).

Auditing Issues Surrounding the Collapse of Lehman Brothers

Poor, ineffective and weak auditing leads to the unexpected collapse of the company Lehman Brothers. The main objective of auditing is to examine the financial condition of a company and predict the foreseeable future. Correct auditing helps investors in making the perfect and more accurate financial decisions. Such types of conclusions are made in the context of the projected financial future of the company. In this context, the auditing that was done in Lehman Brothers was not exact and accurate. On the other hand, it is also analyzed that, the commitment of the company towards subprime loan was an outcome of their hopes that the prices in the sector of housing will not change downwards and the market boom would be sustained (Dias, Rodrigues, & Craig, 2016). It clearly indicates that, the view of company was influenced by the negligence in the reports of audit. Simply, it can be said that, the auditing report made by the company were unable to make long term projection correctly by putting consideration market uncertainties and risks. This incapability reduced them unable of executing counter policies when the marketplace circumstances varied. Their inspection reports should have exposed the extreme borrowing that elevated their influence ratio above what is required by US regulations (Kilian, 2016).

Recommendation

There are many lessons that can be learned by failure of Lehman Brothers. For example, a company should not try to modify the standard accounting practices to earn profit and save money. Moreover, a company should not use new and new techniques to predict the disaster. On the other hand, it is not only important but essential for any type of company to pay special attention on adopting as well as executing strong and best risk management policies, norms, standards and strategies. All the auditing practices should be effectively communicated at all. For case, the guidelines, norms, regulations provided for in ASA 701 should be communicated effectively. Along with this, it is the key responsibility of the auditors of the company that they should communicate all the matters involving potential events, risks, transactions. In the same way, auditors as well as official should be more responsible and ethical (Guttmann, 2016). Apart from this, timing of accounting transactions, use of repos, and falsification of accounting information must be eradicated. The responsible people should be more vigilant and they should pay attention on monitoring measures proposed by regulatory bodies. The financial statements and reports of a company should be critically evaluated in order to avoid unethical and illegal practices. Moreover, legal framework for bailing out firms in financial distress should be made available. At the same time, financial stakeholders as well as investors should not heavily depend on a company’s audited accounts in order to make investment or financial decisions (Khan, & Bashar, 2016).

Conclusion

Overall, it can be summarized that, due to the unqualified as well as poor auditing, Lehman Brother faced the problem of bankruptcy. This failure could be avoided by the company by communicating ASA 701. Moreover, this report is also suggested that, new auditing standards should be approached to deal with the potential issues. At the same time, all the regulatory bodies should support effective monitoring as well as supervision. It must be ensured by regulators that they have clear understanding and rules for making and analyzing accounting statements.

References

Balakrishnan, K., Watts, R., &Zuo, L. (2016). The effect of accounting conservatism on corporate investment during the global financial crisis. Journal of Business Finance & Accounting, 43(5-6), 513-542.

De Haas, R., & Van Lelyveld, I. (2014). Multinational banks and the global financial crisis: Weathering the perfect storm?. Journal of Money, Credit and Banking, 46(s1), 333-364.

Dias, A., Rodrigues, L. L., & Craig, R. (2016). Global financial crisis and corporate social responsibility disclosure. Social Responsibility Journal, 12(4), 654-671.

Guttmann, R. (2016). How Credit-money Shapes the Economy: The United States in a Global System: The United States in a Global System. Routledge.

Khan, H., & Bashar, O. K. (2016). Does globalization create a’level playing field’through outsourcing and brain drain in the global economy?. The Journal of Developing Areas, 50(6), 191-207.

Kilian, L. (2016). The impact of the shale oil revolution on US oil and gasoline prices. Review of Environmental Economics and Policy, 10(2), 185-205.

O’connor, J. (2017). The fiscal crisis of the state. Routledge.