International Accounting Report: Analysis of Lehman Brothers' Collapse

This report provides an in-depth analysis of the Lehman Brothers bankruptcy, examining the accounting practices and failures that contributed to the company's collapse. It focuses on the use of Repo 105, a controversial accounting technique, and how it masked the company's financial instabi...Read More

Running head: INTERNATIONAL ACCOUNTING
International accounting
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INTERNATIONAL ACCOUNTING
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Conclusion:................................................................................................................................3
References list:...........................................................................................................................5

INTERNATIONAL ACCOUNTING
Introduction:
The accounting defect that was used by Lehman Brothers was Repo 105 under which
the short term loans were classified as the item for sale. Under this system, the company was
allowed to enter into repurchase agreement that allowed them to borrow funds in excess in
exchange for collateral for shorter duration (Wiggins and Metrick 2019). The economic
failure which was related to the Lehman Brothers was one of the largest and most
complicated situations in history of the U.S.
Discussion:
In the early 2004-2005, Lehman brothers adopted around five mortgages including the
BNC and the Aurora Loan services without providing full security documentations to the
borrowers. There were incomes from several fields including the real estate business has
incremented the flow of income by a greater percentage in early years including the security
amount and thereby they had announced a net profit income of $4.2 billion on $19.3 billion
revenue the profit which earned (Dodo 2017).
All of a sudden they filed for insolvency procedures, they are considered as the U.S
largest bankruptcy in the late 2008. This collapse provided huge money market move,
whereas in a span of 3 hours there was US$550 billion changed hands which witnessed an
immediate response and injection from the U.S. Treasury of US$105 billion, sooner or later
the money market shut down when they found result from the above scheme (Kim and Song
2017).
There are a number of factors which had increased the probability of the shutting
down the major financial institutions under the defective accounting policy which are stated
below:

INTERNATIONAL ACCOUNTING
 The money lending and borrowing techniques were very irresponsible and insecure as
well.
 The higher rate of dependency on the investors for the purpose of capital investments
and also credit ratings.
 The principles which were laid down were weaker and there were also several risks
which were related to it and also the self assumption of them auto correcting
themselves which the one of major drawback of the accounting policies by them
(Adu-Gyamfi 2016).
 There were undesirable and insecure risk taking and a vicious circle of investment and
unguaranteed returns of the investment.
 Also the involvement of the companies in the complex marketing and purchasing of
products which also somehow resulted in insufficient risk management.
 There was a lack of monitoring the financial regulatory framework and reducing the
dangers across has synchronized entities and markets.
 Most recently in the year of 2009 the accounts which was published also depicted a
number of risks involved with it which was on a greater note rewarded when the firm
and its executives generated profits on a larger scale. On Lehman, competing with the
commercial banks would be a huge task by utilizing high amounts of leverage
(Wiggins and Metrick 2019).
Conclusion:
The downfall of Lehman evidently shows the relationship in between regulations and
action management arrangements. It also made the bankruptcy court to taste and handle such
a complicated situation for the first time. The resolution however was a very costly affair.
With respect to the allowable party claims 21 percent based on it was given to the third party

INTERNATIONAL ACCOUNTING
in that case. There decision making was improper and unethical which resulted in the
disintegration of the Lehman’s accounting policy. They were also involved in improper and
unethical business practices by manipulating their balance sheets, however it cannot be said
that there was sudden shut down of this policy sufficient warning were given much
beforehand thereby resulting in the contraction of the credit market.

INTERNATIONAL ACCOUNTING
References list:
Adu-Gyamfi, M., 2016. The Bankruptcy of Lehman Brothers: Causes, Effects and Lessons
Learnt. Journal of Insurance and Financial Management, 1(4).
Dodo, A.A., 2017. Corporate collapse and the role of audit committees: A case study of
Lehman Brothers. World Journal of social sciences, 7(1), pp.19-29.
Kim, D. and Song, C.Y., 2017. Bankruptcy of lehman brothers: Determinants of cross-
country impacts on stock market volatility. International Journal of Economics and Financial
Issues, 7(3), pp.210-219.
Wiggins, R.Z. and Metrick, A., 2019. The Lehman Brothers Bankruptcy B: Risk Limits and
Stress Tests. Journal of Financial Crises, 1(1), p.3.