Question

Read the Case: Lehman Brothers: Subprime Accounting? and respond to questions 4 and 7. 4. Assume that Lehman's accounting for the Repo 105 transactions met the requirements of GAAP. However, also assume that the entire purpose of the transaction was to intentionally manage the amount of debt shown on the balance sheet. Do you agree with Lehman Brothers and EY that the financial statements are presented fairly in this situation? 7. EY did not modify the 2007 audit opinion of Lehman Brothers for going-concern uncertainty, yet the entity filed for bankruptcy less than a year later. In your opinion, is this indicative of audit failure? Why or why not?

Answer 1

ANSWER:

Certified public accountant (CPA) :

He / She is an accountant who is professionally skilled and passed the uniform CPA examination

and also qualified by the additional state clarification as well as experience requirements.

In the present case, L Brothers filed for bankruptcy on September 15, 2008, and it was the

Largest in the history with assets and had at that time debt amounting $639 billion and $619

Billion respectively. Company L was the fourth-largest investment bankers company at that time.

• There is a list of transactions which is completed by the companies to purposefully manage Earnings and balance sheet.
• If the audit is designed to provide reasonable assurance about the Financial statements in accordance with G A A P, then it provides a minimum threshold and Disclosure.
• Although the G A A P's are followed while preparing the financial statements: it is arguable that it Provides a minimum level of assurance but still there are transactions that need to be separately Disclosed even if the are fallowed.
• This is necessary to provide appropriate information to the stockholders.
• Hence: the accounting for transactions in accordance with G A A.P should disclose the off-balance Sheet transactions.

7). E Y did not modify the 2007 audit opinion of Lehman Brothers for going-concern uncertainty, yet the entity filed for bankruptcy less than a year later. In your opinion, is this indicative of audit failure? Why or why not?

Certified public accountant (CPA)

• He / She is an accountant who is professionally skilled and passed the uniform CPA examination and also qualified by the additional state clarification as well as experience requirements
• In the present case, L Brothers filed for bankruptcy on September 15, 2008, and it was the largest in the history with assets and had at that time debt amounting $639 billion and $619 billion respectively. Company L was the fourth-largest investment bankers company at that time.
• The auditor should evaluate whether the clients ability is to continue as a going concern as per accounting standards.
• Judging the client's ability is not defined in the standards so it is purely on the auditor's professional judgment
• Since bankruptcy is also used sometimes as a strategic choice instead of indicative of failure: so the academic research ongoing concern reporting classifies bankruptcy without indication of audit failure.

• Hence: the mere presence of a subsequent bankruptcy filing is probably not the indicator of the Auditor’s substantial doubt as of the audit report date.