Lehmans auditors ernst young were aware of but did

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Unformatted text preview: 5% or more of the cash received, accounting rules permitted the transactions to be treated as sales rather than financings, so that the assets could be removed from the balance sheet. Lehman’s auditors, Ernst & Young, were aware of but did not question Lehman’s use and nondisclosure of the Repo 105 accounting transactions c N. M. Kiefer Economics 4230: Banks 26/ 40 Nondisclosure was the key Examiner: ”Lehman never publicly disclosed its use of Repo 105 transactions, its accounting treatment for these transactions, the considerable escalation of its total Repo 105 usage in late 2007 and into 2008, or the material impact these transactions had on the firm’s publicly reported net leverage ratio.” Lehman’s reported net leverage was 12.1 at the end of the second quarter of 2008; but if Lehman had used ordinary repos, net leverage would have been reported at 13.9. c N. M. Kiefer Economics 4230: Banks 27/ 40 Date Repo 105 Reported Usage Net Leverage Q4 2007 Q1 2008 Q2 2008 $38.6 B71 $49.1 B74 $50.4 B77 16.172 15.475 12.178 Net Leverage Without Repo 105 17.873 17.376 13.979 Difference 1.7 1.9 1.8 Lehman’s failure to disclose the use of an accounting device to significantly and temporarily lower leverage, at the same time that it affirmatively represented those “low” leverage numbers to investors as positive news, created a misleading portrayal of Lehman’s true financial health.80 Colorable claims exist against the senior officers who were responsible for balance sheet management and financial disclosure, who signed c N. M. Kiefer Economics 4230: Banks 28/ 40 More Examiner’s Findings In May 2008, a Lehman Senior Vice President, Matthew Lee, wrote a letter to management alleging accounting improprieties; in the course of investigating the allegations, Ernst & Young was advised by Lee on June 12, 2008 that Lehman used $50 billion of Repo 105 transactions to temporarily move assets off balance sheet at quarter end. The next day E & Y met with the Lehman Board Audit Committee but did not advise it about Lee’s assertions, despite an express direction from the Committee to advise on all allegations raised by Lee. c N. M. Kiefer Economics 4230: Banks 29/ 40 More Examiner’s Findings E & Y took virtually no action to investigate the Repo 105 allegations. E& Y took no steps to question or challenge the non-disclosure by Lehman of its use of $50 billion of temporary, off-balance sheet transactions. Colorable claims exist that E & Y did not meet professional standards, both in investigating Lee’s allegations and in its audit and review of Lehman’s financial statements. c N. M. Kiefer Economics 4230: Banks 30/ 40 e-mails! Several contemporaneous e-mails retrieved from Lehman archives set forth Lehman’s purpose for Re...
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