Auditing Issues and Lehman Brothers Collapse

Auditing Theory and Practice
2019

ASA 701
Executive Summary
The following report will shed light on the issues pertaining to auditing which ultimately led
into the disintegration of Lehman Brothers along with the KAM that were needed to be
portrayed in the audit report of the company if ASA 701 was implemented prior to the
demise of the same. The report not only highlights the issues pertaining to the audit function
of the company that ultimately led to the collapse of the same but also states the reasons as to
why such material aspects were not projected in its Audit report.
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ASA 701
Contents
Introduction........................................................................................................... 3
Case of Lehman Brothers...................................................................................... 3
Auditing Standard ASA 701- Communicating Key Audit Matters in the
Independent Auditor’s Report................................................................................4
Key audit matters.................................................................................................. 4
1. AGL Energy...................................................................................................... 5
2. APT Management Services..............................................................................7
3. Ausnet Services Limited.................................................................................. 7
4. Spark Infrastructure........................................................................................ 8
Conclusion............................................................................................................. 9
References........................................................................................................... 10
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ASA 701
Introduction
Lehman Brothers ranked number four prior to September 2008 in the investment banking
sector of the US. The company was into the international investment banking business. The
company filed itself for Chapter 11 bankruptcy and declared itself completely bankrupt in the
month of September 2008. The management of the company did not opt for assessment of its
potential and underlying risks was one of the major reasons attributing to the company’s
failure (Elder, Beasley & Arens, 2010). The auditors of the company too didn’t bother about
informing the management about the impact of such underlying risks which further
aggravated the problem. The auditors were unprofessional enough in conducting audit
function in the Lehman Brothers as it is easily reflected from the audit report that significant
aspects and numbers were not disclosed in the financials of the company, which otherwise
would have saved the same from its untimely demise (Goergen, 2012).
Case of Lehman Brothers
Lehman Brothers made huge investments risky projects without even evaluating the risks
associated with the same. As the housing industry was booming at a fast pace between 2001
and 2008, the management of the company considered investing in the housing industry
owing to its huge returns and therefore, the same began heavy borrowing so as to invest in the
housing industry. The company also invested all its proceeds apart from borrowings in the
housing industry (Viney, 2010). The company also invested a huge amount in Real Estate and
private financing. Therefore, the company failed majorly due to its impulsive decisions
regarding making huge investments in various risky projects and also due to heavy
borrowings for the same purpose. The sudden demise of Lehman Brothers was a shock for
the United States economy. On account of the GFC, the banking institutions in the United
States suffered a huge set back with respect to losses borne by the same. The Lehman
Brothers also suffered heavy losses as the price of the same went below 27% of its former
value (Wiggins, Piontek & Metrick, 2014). The role of the auditors raised eyeballs due to this
sudden disintegration of Lehman Brothers and the global financial crisis. Several auditing
standards were newly formulated due to the prevalence of global financial crisis such as ASA
701 that deals with key audit matters communication (Baldwin, 2010).
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