Project 1 Accounting & Finance
1. Identify an accounting scandal at a corporation that has resulted in a loss of reputation to the accounting profession. Explain the crime(s) committed.
In early 2008 Lehman borrowed large amounts to fund its investing in the years leading to its bankruptcy in 2008, “a process known as leveraging or gearing”. A large part of their investments were towards housing market, making it vulnerable to a downturn in that market. This firm generated large profits during the housing boom, this place them in a vulnerable position; once a loss 3-4% of its value of it would diminish its book value or even equity. Furthermore, Investment banks are not subjected to the same regulations applied to banks to restrict their risk-taking.
The 1st sign of trouble for Lehman was in of August 2007; the firm closed its subprime lender, BNC Mortgage, the cut 1,200 positions in 23 different locations, “and took a $25-million after-tax charge and a $27-million reduction in goodwill” (Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report).
Now where the eye brows were raised was in March of 2010, a “report of Anton R. Valukas, the Bankruptcy Examiner, drew attention to the use of Repo 105 transactions to boost the bank 's apparent financial position around the date of the year-end balance sheet” (Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report). “Attorney general Andrew Cuomo later filed charges against the bank 's auditors Ernst & Young in December 2010, alleging that the firm "substantially assisted... a massive accounting fraud" by approving the accounting treatment” (LATTMAN, 2010).
Lastly, on April 12, 2010 a story broke about the incident concerning Lehman in the New York Times, Lehman was caught using a small firm name Hudson Castle, they used it to “move a number of transactions and assets off Lehman 's books as a means of manipulating accounting numbers of Lehman 's finances and risks One Lehman executive described Hudson Castle as an
In early 2008 Lehman borrowed large amounts to fund its investing in the years leading to its bankruptcy in 2008, “a process known as leveraging or gearing”. A large part of their investments were towards housing market, making it vulnerable to a downturn in that market. This firm generated large profits during the housing boom, this place them in a vulnerable position; once a loss 3-4% of its value of it would diminish its book value or even equity. Furthermore, Investment banks are not subjected to the same regulations applied to banks to restrict their risk-taking.
The 1st sign of trouble for Lehman was in of August 2007; the firm closed its subprime lender, BNC Mortgage, the cut 1,200 positions in 23 different locations, “and took a $25-million after-tax charge and a $27-million reduction in goodwill” (Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report).
Now where the eye brows were raised was in March of 2010, a “report of Anton R. Valukas, the Bankruptcy Examiner, drew attention to the use of Repo 105 transactions to boost the bank 's apparent financial position around the date of the year-end balance sheet” (Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report). “Attorney general Andrew Cuomo later filed charges against the bank 's auditors Ernst & Young in December 2010, alleging that the firm "substantially assisted... a massive accounting fraud" by approving the accounting treatment” (LATTMAN, 2010).
Lastly, on April 12, 2010 a story broke about the incident concerning Lehman in the New York Times, Lehman was caught using a small firm name Hudson Castle, they used it to “move a number of transactions and assets off Lehman 's books as a means of manipulating accounting numbers of Lehman 's finances and risks One Lehman executive described Hudson Castle as an
Cited: EXHIBIT 1 Changes in SAS 99 from SAS 82 . (2005, June). Retrieved June 2, 2011, from THE CPA JOURNAL: http://www.nysscpa.org/cpajournal/2005/605/images/ex1p38.pdf LATTMAN, P. (2010, Decemeber 21). Cuomo Sues Ernst & Young Over Lehman. New York City , NY, United States Of America . Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report. (n.d.). Retrieved June 2, 2011, from Jenner & Block: When it 's a matter of importance: http://lehmanreport.jenner.com/