Case Study : Lehman Brothers Case

1813 Words Apr 4th, 2016 8 Pages
Lehman Brothers Case

Group 11


Group Members: Bobak Namdar, Daniel Gavrilov, Chia Shen Ng

Professor Daniel Archabal

2. Do you agree with the assertion that “intent doesn’t matter” when applying accounting rules? That is, should reporting entities be allowed to apply accounting rules or approved exceptions to accounting rules for the express purpose of internationally embellishing their financial statements or related financial data? Defend your answer.

According to Martin Kelly, Lehman’s former financial controller, a review of the 2007 and 2008 10-K and 10-Q filings would not reveal the use of Repo 105 transactions. If the end user’s understanding of financial statements is materially affected by an accounting adjustment, then financial reporting standards mandate its disclosure. Since the only apparent purpose for accounting the Repo 105 transaction by Lehman as a “sale” rather than an ordinary financing activity was to manage the company’s leverage ratios in its financial statements, management must have known Repo 105 activity would affect end users’ judgement of the bank’s financial standing, hence, creating a case for fraudulent reporting.

When discussing this situation, people take different views on whether Lehman was at fault for bending GAAP code. Some say “intent doesn’t matter” and that anything goes as long as it is technically compliant with the laws. Lehman used the law to its advantage to deceive…
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