Major problem
The major problem with the Lehman brothers was their desperation. The executives of this firm were so desperate to trick investors and credit reporting agencies, that they engaged in techniques to “cook the books” to cover up their schemes. To be more exact, Lehman entered into agreements known as ‘Repo 105.’ This repo is referred to as “an accounting maneuver used to shift the assets off Lehman’s books in return for a promise to buy back the securities at a premium days later.” In this agreement, the company entered into agreements with banks in the Cayman Islands to sell the bank their “toxic” securities amounting up to $50 billion with the stipulation that they would reacquire them within a short time. Not only did they take $50 billion from the bank, they used the funds to pay off some of their debt items, thus making the firm, as a whole, look better towards the end of the year. This scandal somewhat mirrored that of Enron, except these series of events affected the country and our global economy (Rappaport).
This scandal not only placed a damper on the reputation of Lehman Brothers, but also caused potential audit clients to second guess the reputation of well-known audit firm, Ernst and Young. Ernst and Young helped Lehman Brothers cover up its financial condition for more than seven years from 2001 to 2008, while collecting more than $185 million in fees from the firm. Reports made stated that Ernst and Young “directly facilitated an accounting sleight of hand that burnished [or polished] the securities firms balance sheet.” In the audit firm’s defense, reps responded stating that there was “no factual or legal basis to bring a claim against the firm and it would vigorously defend the claim.” Also, they stated that Lehman’s bankruptcy filings were in no relation to the accounting issue at hand and that Lehman’s accounting standards were always in accordance with Generally Accepted Accounting Principles (GAAP) (Rappaport).