Yale Program on Financial Stability Case Study 2014-3D-V1
22 Pages Posted: 7 Apr 2015
Date Written: October 1, 2014
For many years prior to its demise, Lehman Brothers employed Ernst & Young (EY) as the firm’s independent auditors to review its financial statements and express an opinion as to whether they fairly represented the company’s financial position. EY was supposed to try to detect fraud, determine whether a matter should be publicly disclosed, and communicate certain issues to Lehman’s Board audit committee. After Lehman filed for bankruptcy, it was discovered that the firm had employed questionable accounting with regard to an unorthodox financing transaction, Repo 105, which it used to make its results appear better than they were. EY was aware of Lehman’s use of Repo 105, and its failure to disclose its use. EY also knew that Lehman included in its liquidity pool assets that were impaired. When questioned, EY insisted that it had done nothing wrong. However, Anton R. Valukas, the Lehman bankruptcy examiner, concluded that EY had not fulfilled its duties and that probable claims existed against EY for malpractice. In this case, participants will consider the role and effectiveness of independent auditors in ensuring complete and accurate financial statements and related public disclosure.
Keywords: Systemic Risk, Financial Crises, Financial Regulation
JEL Classification: G01, G28
Suggested Citation: Suggested Citation
Wiggins, Rosalind Z. and Bennett, Rosalind L. and Metrick, Andrew, The Lehman Brothers Bankruptcy D: The Role of Ernst & Young (October 1, 2014). Yale Program on Financial Stability Case Study 2014-3D-V1. Available at SSRN: https://ssrn.com/abstract=2588551 or http://dx.doi.org/10.2139/ssrn.2588551