Lehman Brothers Case

Written Case Analysis

Synopsis

The story of Lehman Brothers starts back to 1844 when a 23 year old Henry Lehman immigrated to the United States from Bavaria. He decided to settle in Montgomery Alabama where he opened a retail store. In 1847 another of three brothers arrived and by 1850 the third one came. “King Cotton” had a high market value and seeing a market for this; the 3 brothers started to accept payment in cotton for goods and also created a secondary market for trading in cotton. Seeing the need to be closer to the liquid market of cotton in New York the firm relocated to New York in 1858. In 1870, the Lehman brothers made the New York City office the headquarters of their business. Later in nineteenth century, Lehman brothers expanded their business to include trading of other commodities, and joined the Coffee Exchange and also the New York Stock Exchange. In early years of twentieth century, Lehman brothers focused on investment banking. During the same time frame, the firm started underwriting some bigger public companies. The names of Sears Roebuck and Company, Woolworth, Macy & Company, and B.F. Goodrich where all part of their earlier team deals with Goldman Sachs. It was making a big name for itself on Wall Street. During the Great Depression, much of the focus of Lehman went toward venture capital as the equity markets were being hammered.

The case discusses the rise and fall of Lehman Brothers Inc (Lehman Brothers) from a small dry goods store to one of the leading investment banks in the US. It examines in detail the reasons that led to the subprime crisis since the year 2007 in the US and how it led to the collapse of 158 year old Lehman Brothers. The case highlights the role of several stakeholders in the mortgage business that contributed to the crisis. It examines the various factors that contributed to the fall of Lehman Brothers including leadership issues, excessive leverage, failure of risk measures employed like 'Value at Risk' and poor regulation of the investment banking industry. It also explains the role of certain OTC derivative instruments that led to the collapse of the company.

Key Issues Related to Auditing

1. When Lehman was unable to obtain legal opinion from U.S. firm regarding Repurchase 105 (Repo 105) transactions, should have triggered the auditors to examine the need for such repo transactions by Lehman and the use of such transactions in the financial statement. This clearly has been accounting motivated transactions that the auditors of Ernst &Young let pass by them.

2. Getting paid 29.5 million for audit job for 2007 is a high amount which means that the auditors