Lehman Brothers Case: Financial Reporting and Auditing Considerations

• In Event: Audit Effectiveness and Market Reactions

Abstract

Lehman Brothers Company grew from a dry goods store in Montgomery, Alabama in 1844 to become a leading investment bank. The firm was involved in initial public offerings of many well-known companies. A part of its financial strategy was to engage in repurchase agreements. These transactions involve obtaining cash and other assets, using investment securities as “collateral”. Typically, the contract allows (or mandates) the repurchase of the same or similar securities. Accounting for repurchase agreements would differ depending on whether the transaction was considered a sale of the securities or as a secured borrowing. This case integrates financial reporting and auditing concepts. This type of integration is the very thing that is done during a financial audit of a company. To this end, the assignment calls for (1) the preparation of journal entries, (2) a synopsis of accounting standards involving these types of transactions, and, (3) a consideration of how to deal with disclosure issues on an audit. The case was assigned to students taking a graduate course in auditing. Students generally agreed that including accounting topics in an auditing course was appropriate.

Authors

• Thomas J Hogan, University of Massachusetts Boston

• Yong-Chul Shin, University of Massachusetts Boston

• Surjit Tinaikar, University of Massachusetts Boston