Lehman Brothers Collapse: Repo 105 and Auditor Ethics
This case study examines four key questions arising from the collapse of Lehman Brothers, with particular focus on the role of external auditor Ernst & Young. The paper evaluates Ernst & Young's responsibility in developing and monitoring Lehman's Repo 105 policy, addresses whether "intent doesn't matter" in accounting rules, considers whether auditors must identify and challenge accounting-motivated transactions, and analyzes the decision to report Lehman's net leverage ratio only in a financial highlights table rather than in the full financial statements. Throughout, the paper argues that external auditors bear a clear ethical and professional duty to remain independent, speak plainly to clients, and refuse to lend credibility to reporting practices that mislead investors.
- Introduction: Overview of four case study questions on Lehman Brothers
- Ernst & Young's Responsibility in the Repo 105 Policy: Auditor duty to monitor and challenge Repo 105 policy
- Does Intent Matter in Accounting Rules?: Why intent still matters despite technical rule compliance
- Auditor Duty to Challenge Accounting-Motivated Transactions: When auditors must intercede in non-operational transactions
- The Net Leverage Ratio and Reporting Omissions: Omitting leverage ratio from full financial statements
- Conclusion: Auditor independence and lessons from Lehman's collapse
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What makes this paper effective
- The paper uses a consistent ethical through-line — auditor independence and transparency — to connect each separate case study question, giving the analysis coherence across its sections.
- The attorney/client analogy in Question One is a concrete rhetorical device that makes the abstract concept of auditor duty more accessible without overstating the comparison.
- The paper acknowledges nuance (e.g., one-time charges being legitimately different from recurring losses) before restating its main position, which strengthens rather than weakens the argument.
Key academic technique demonstrated
The paper demonstrates applied ethical reasoning: it takes a real corporate failure and systematically works through the professional obligations of a third-party actor (the external auditor). Rather than simply asserting wrongdoing, each section tests a principle against a specific scenario — Repo 105 policy design, accounting-motivated transactions, and selective disclosure — and derives a defensible position. This technique is well-suited to business ethics and accounting case studies at the undergraduate level.
Structure breakdown
The paper follows a question-and-answer case study format with a brief framing introduction and a synthesizing conclusion. Each body section addresses one assigned question, opens with a restatement of that question, presents a clear position, and then develops supporting reasoning. The conclusion draws the individual answers together by invoking the broader lesson of the Arthur Andersen/Enron scandal as a cautionary parallel.
Introduction
This report answers several case study questions related to the collapse of Lehman Brothers and the events that led up to it. The first question concerns Lehman Brothers' Repo 105 policy and what responsibility Ernst & Young, its external auditor, had to help develop the accounting policy and process, as well as to monitor Lehman's usage and compliance after the fact. The second question asks whether there can be agreement with the statement that "intent doesn't matter" as it applies to accounting rules. The third question asks whether auditors have a responsibility to determine if important client transactions are "accounting motivated," and requires a defended response. Finally, the paper analyzes Lehman's net leverage ratio in relation to the fact that the figure was not reported in the full financial statements but appeared only in a financial highlights table, and addresses whether auditors have a duty to insist on changes in such a situation.
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