question archive 1) Why do you think was EY not held liable for the incident as much as investors wished? I think that EY was not really held liable because nothing being done was a technical violation of GAAP rules and auditing standards of the time
1) Why do you think was EY not held liable for the incident as much as investors wished? I think that EY was not really held liable because nothing being done was a technical violation of GAAP rules and auditing standards of the time
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1) Why do you think was EY not held liable for the incident as much as investors wished?
I think that EY was not really held liable because nothing being done was a technical violation of GAAP rules and auditing standards of the time. The wording was vague in such a way that allowed Lehman to make that loophole and not violate any GAAP rules. Therefore, in EY issuing an unmodified opinion and stating everything was in compliance with GAAP, they were not lying; nor were they aware, at least in 2007, the scale and purpose of those repo 105 transactions.
If they had been aware at that time of how the company was using the repo 105 transactions to seem healthier financially than they were and EY still issued an unmodified opinion, then they would have been held accountable. However, with the resources provided to them they really had no way to know that anything suspicious was happening until the next year when they saw all of the bonds being repurchased. I do believe that in stating no modifications needed to be made in the next year after seeing the whole process of the repo 105 being carried out, that they should be held liable.
In the NYTimes article above, the judge said, "the fact that Lehman’s accounting for the Repo 105 transactions technically complied with the rule does not mean that Lehman’s financial statements complied with GAAP.” What do you think it means?
A big component of complying with GAAP standards is the assertion that is made stating that the financial statements are free of material misstatements and accurately represent the financial health of the company. While the repo 105 method technically did not violate any GAAP rules, that doesn’t mean the financial statements complied with GAAP. This is because the financial statements did not accurately portray the financial health of the company and misled investors.
2) I think the reason why EY wasn’t held as accountable was that they concluded and continued to conclude that they conducted their audit in compliance with GAAP. They were also willing to settle quickly too to put the matter behind them instead of defending their side of the story. I think what also helped them was that the Judge on the case thought that the 2007 financial statements weren’t that bad even though they should have done something differently in the last few weeks of their audit. Also because the Repo rule was in compliance with GAAP it helped EY even though the Lehman Brothers were able to find a loophole. Also I think that since the judge ruled that evidence to be brought that doesn’t prove they violated GAAP also helped in EY’s case.
I think a lot of people who intend to do fraud look for every loophole they can find to be able to justify their reasoning or even to try to “save” themselves when it comes to legal action. I also think that for companies who aren’t performing well they particularly look for loopholes. I also think that since it complied with the rule and not GAAP it could be that there wasn’t a standard in GAAP that deals with a situation like this. Like the article mentions, GAAP can recognize itself with compliance to GAAP but it also could be misleading to the financial statements. This is where I think that companies could interpret the standard wrong if there seems to be a loophole somewhere. I think for companies it should be important to understand and fully be able to interpret GAAP if they are to do any accounting standards.
