Lehman Brothers and Repo 105
Posted: 5 Feb 2012
Date Written: December 9, 2011
The collapse of Lehman Brothers in 2008 was the largest bankruptcy in US history. The case examines the economics of the off-balance sheet transactions Lehman undertook prior to the collapse, and highlights the corporate governance challenges in situations where firms face capital market pressure and market downturns. In particular, the case examines the financial accounting, auditing and internal management control practices around the Repo 105 transactions, which had a significant effect on the leverage position of the company. Based on the findings of the bankruptcy examiner's report, the case focuses on the role that management, external auditors, and the audit committee played in what amounted to a significant control failure.
Learning Objective: The case introduces students to the business model of a highly leveraged investment bank, and helps to understand the economics of off-balance sheet financing and how it is captured by financial accounting. It invites a discussion on the roles of management, the audit committee, and the external auditors, in managing the risks of financial reporting and control in the face of capital market pressure and market downturns.
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