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Lehman brothers

The trick works perfectly, and manages to lure unsuspecting investors into trusting the company’s financial reports. Banks however use Repo 105 for purposes of short term borrowing, while in the case of Lehman, it was used to reflect a healthier balance sheet than it actually was. Jeffers (2011, p. 2) observes that the Lehman brothers used the “Repo 105” in its accounting severally to report impressive financial statements and win the trust of potential investors, by showing healthy securities. The company was an investment bank which had gone global. Lehman’s’ auditors on three occasions used the Repo 105 creative accounting trick to boost investor confidence. The trick used by Lehman helped them temporarily remove from its balance sheet roughly $ 50 billion, making the balance sheet look better the actual status of the company’s financial statements. However, at the time of filing its bankruptcy case, the company has a total of $ 639 billion in assets and $ 619 billion in debts. This formed the biggest bankruptcy case that affected over $ 10 trillion in investments. The company’s scheme involved the use of collateral firms such as Alpha Ville, with counter parties from banks such as Barclays Bank of Britain, USB of Switzerland, Mizuho Bank and Mitsubishi UFJ Financial Group. To be exact, the company involved in Repo 105, the transactions’ worth was estimated at over 105 per cent of the actual cash it received. This meant that the company was experiencing a shortage through these transactions. When they repaid the cash it received from the counterparties, interest was included, which made it a very expensive technique, thus losing money. Repo 105 is a tricky phenomenon for any company which opts to use it as a model of reporting its financial status. According to accounting standards, it is wrong and unethical for a firm to alter its books of accounts (Nguyen & Gong, 2012, p. 31). It is an issue that is quite sensitive, deciding to report a misleading state of a company’s financial status. Whether such a situation finds its way to legal courts or not, it makes no difference, involved parties ought to hold responsibility for any eventuality through their actions. Not unless a company is planning on a strategy to defraud and steal from potential investors, it would never go to such lengths like Lehman did, with clear knowledge of the implications that are likely to come (Law, 2011, p 511). Some examiners hold that “Repo 105” actually is a “gross negligence” and does not amount to crime. However, the fact that Lehman altered its accounts with the intention of deceiving investors, rating agencies and perhaps the industry regulators is proof enough that this was criminal and that the presenters of the company acted in malice. The scheme led to the largest corporate bankruptcy case in the United States financial history (Sharp, 2010, n.p). Investors lost money, in the process. No matter how much conservatives refer to this as a form of negligence, it is still a crime. According to the accounting theories, Lehman accountants and managers contravened the theories of accounting and broke the oath of conduct of accountants. Although some scholars like Jennings (2011, p. 38) felt that the internal misleading of the company itself by the altered ...Show more

Summary

LEHMAN BROTHER AND THE “REPO 105” SCANDAL By Institution Date Lehman Brothers and the “Repo 105” Scandal 1. The “Repo 105” is an accounting trick commonly used by banks and other financial institutions such as investment banks, whereby they report a short-term loan as a sale, which of course is not…
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