Key Role in Tampering the Financial †Free Samples for Students

Question: What Is the Key Role in Tampering the Financial? Answer: Introduction Lehman Brothers initially offered international financial services to its customers until 2008, when it became bankrupt and had to lose its title of being the fourth largest investment-banking firm in the United States. The prime reason behind such bankruptcy was the improper evaluation of risks on the part of the management and failure on the part of auditors to warn the management about the consequences of the same (Manoharan, 2011). It can be said that the catastrophe occurred due to the collective failure and hence, lead to a massive loss. Therefore, effective strategies and control measures are the need of the hour so that enhanced procedures can be easily carried out. Besides, if the auditors had not been negligent on their part, the firm would have been saved from a downfall. In other words, if the auditors had not concealed relevant data from the financial statements, such a tragedy would not have occurred. Significant facts that must be considered during preparation of financial statements There was a major boom phase betwixt the year 2001 and 2008 in the housing market that forced Lehman Brothers to borrow a large amount of money and invest the same in the market. However, the expectation of Lehman regarding the phase to be a profitable venture was quashed when the situation deteriorated with the fall in the sub-prime mortgage business in the same segment. This sheds light upon negligence and improper evaluation of the outcomes that could follow in lieu of such heavy investments in risky assets (Jubb, 2012). In addition, the firm invested its own funds into real estate businesses and private financing that worsened its situation. Instruments took into use Lehman Brothers had undertaken a very inappropriate and improper decision by falsely utilizing Repo 105 transactions. The reason behind this decision was to depict an effective image of the firm in the eyes of financial institutions and public investors. Furthermore, this decision could have allowed the firm to procure more borrowings from the market (Wiggins et.al, 2014). It needs to be noted for the purpose of raising funds various decisions are taken by the term that erodes the entire goodwill and leads to major losses. Thus, by keeping its securities as collateral, the firm settled all its debt obligations from the borrowed funds (Arens et. al, 2013). However, such repo transactions were the key cause of the firms destruction as these deteriorated the securities by reflecting the transactions as inventory sale for securities. Nonetheless, the auditors played a significant part in concealing the duplication of securities forming part of the balance sheet and also hiding the firms actions regarding reflection of securities as collateral by third parties as nothing in the financials (Zhang et. al, 2007). Furthermore, the borrowed loans were depicted as sale proceeds of investment securities and hidden from the financial statements as well. Commercial papers and Repo transactions Both commercial papers and repo transactions assisted the management of Lehman to procure short-term loans by mortgaging the long-term investment securities and other assets. However, Lehman took advantage of the same and procured immense borrowings on a regular basis, thereby generating huge risks. Nonetheless, due to such decisions and measures, the downfall of Lehman occurred (Messier, 2013). Besides, the failure of Lehman to meet its obligations and restrictions on the part of financial institutions to accept additional securities as collateral made the firm prone to immediate risks. Furthermore, not even a single concern regarding the firm was depicted in its financial statements as the auditors concealed every material fact. If such concealment would not be made by the auditors (Ernst and Young LLP), it would be possible to safeguard the firm from collapse or delayed it to some extent. Communication of significant audit matters in independent audit report ASA 707 was incorporated into financial reporting on December 15. The standard intends to keep a record of significant audit matters that must be communicated to the management of any audit firm. Furthermore, such standard operates like a boon for the users of financial statements of a company as they can now observe the relevant matters related to the company in order to make significant decisions in the future and avoid losses as well. Besides, in relation to Lehman, users would have easily determined such financial statements if the auditors endeavored to avoid concealment of relevant facts (Reed, 2008). Nonetheless, it is the responsibility of the auditors to concentrate on matters, which are more relevant during their audit processes. In addition, it is the auditors duty to find details on matters that possesses a high risk of fraud or material misstatement, matters associated with large-scale uncertainties, and influence of all these matters on other transactions during the course of audit procedures (Wearden et. al, 2008). Auditing issues that resulted in the collapse of Lehman Brothers Since ASA 701 was absent at the time of occurrence of Lehman Brothers case, it could not safeguard the firm from disintegration. Moreover, auditors gained leverage due to the same and endeavored to conceal material facts from the financial statements. Furthermore, the reason behind the disintegration of Lehman can also be attributed to the presence of loopholes in the regulatory system (Fox, 2009). The auditing issues that resulted in the downfall of the firm are as follows: Concealment of wrongly stated leverage ratios In the year 2008, the leverage ratio of Lehman reported a significant decline in comparison to the past years. Furthermore, the firm made use of Repo 105transactions in order to reflect such decline as false or temporary in nature. The key influence on such leverage ratios was because of untimely payments of repo transactions debts that were made at the termination of fiscal quarter periods (Hoi et. al, 2009). This assisted in recreating the securities in the firms financial statements. Moreover, all this could have resulted in minimizing such ratios to a level that would force the auditors to depict the same in the audit reports and financials of the firm. Matters that were required to be reported to the management reflect the key concerns that played a major role in the downfall of Lehman. Besides, if there existed ASA 701 auditing standards during the collapse of Lehman, auditors could not have dared to attempt such unethical steps, thereby safeguarding the firm from downfall (Ghandar Tsahuridu, 2013). Ultimately it can be commented that the funds that were raised were classified in a wrong manner. Approval of Repo 105 transaction for falsification of financials Lehman Brothers created the Reverse Repo policy and Repo 105 policy with prior permission from the auditors. Moreover, it was done by the firm to depict the same in its financial statements in the form of investment trading. Besides, it was the major duty of the auditors to indicate the happenings of such steps. The disclosures were not provided by the auditors that created a risky situation. The acts of the auditor were unethical that ultimately lead to the downfall (Story Dash, 2010). Nonetheless, the firm also started reflecting its equities as collateral in opposition to fixed-income securities in order to conduct smooth operations of Repo transactions. Failure to disclose non-approval of true sales opinion in the United States Lehman Brothers were responsible for procuring a true sales opinion in the United States that would allow it to conduct its affairs in a smooth manner. This was because of the firm reflecting the Repo 105 transactions under FAS 140 as Sales. Moreover, in order to procure such permission, Lehman had to enter into an agreement with the financers of UK because they were unable to attain such permission in the US. The agreement was that the firm had to trade and reflects their securities only within the UK that allowed it to conduct billions of dollars of transactions (Elder et. al, 2010). However, eventually, the firm attempted to transfer American fixed-income generating securities that were worth billions of dollars. Besides, auditors being aware of the same never reported the same in the firms financial statements. Non-disclosure of improper treatment of repo transactions in Notes to Account and Auditors report It was the decision of the firm to prevent disclosure of impacts of the Repo 105 transactions because disclosure of the same would make the firm vulnerable to inadequate situations by exposing its huge debt obligations and unaltered leverage ratios as well (Tepalagul Lin, 2015). Furthermore, auditors in concealing material impacts caused because of the transaction played the key role. Nonetheless, these are the reasons why the firm attempted not to disclose such data. Approval of financial statements that hide Repo 105 transactions It was not disclosed anywhere that the firm had a liability to buy back billions of securities from third parties as temporarily transferred resources. Furthermore, both the auditors and the firm endeavored to depict such transactions as minimal fluctuations in the financial statements (balance sheet) based on the report of the management. Therefore, a major disclosure was concealed by the auditors that had the capacity of affecting Lehman Brother. In addition, the firm depicted that re-procurement of securities were done at a lesser cost and was depicted and concealed under derivates of large-scale nature (Tepalagul Lin, 2015). Besides, Lehman made clever attempts to put all such transactions at the footnotes of its financials. Moreover, every such thing was done prior to the permission of the auditors. Classification of inappropriate funds raised and used through Repo transactions by FAS 140 Lehman attempted to depict its short-term financing transactions under sales through utilization of repo transactions. Furthermore, the securities that were depicted as collateral were quashed and removed from the balance sheet of the firm. In place of this, Lehman attempted to minimize the liabilities in order to reflect the image that the firms securities were being provided to the third parties as compensation and there was a reduction in the leverage (Ghandar Tsahuridu, 2013). In addition, the loans procured by the firm were intended to form part of the balance sheet until their repayment had been made. However, the transactions were treated as sales so the sold securities were subtracted from the assets and there was no indication of liabilities. The above-discussed points clearly state what were the chief matter in the Lehman Brother case that needs to b communicate with the ones charged with governance. The presence of ASA 701 at that point of time (Auditing Standard) for Lehman Brother and auditors then such matter could have been restricted and the investor community could be saved. Huge losses could have been averted if the standard were present at that point of time. Hence, ASA-701 could have been a strong protector and lead to a strong course of action of the investor community. Recommendation It is upon the auditors to reflect the real image of the financial statements of the firm. The company and the society rely upon the auditors because they depict a real image of the company in each way and in order to adhere to the same, the auditors are required to comply with auditing standards. It is, therefore, imperative that the auditor must act in a way that is beneficial to the company and the investor. Moreover, it is expected that an independent view must be provided by the auditor. In relation to Lehman Brothers, the auditors can be held liable for the suffered losses by third parties who significantly depend on the firms financial statements made by auditors. It is the duty of auditors to shed light on the errors of the management that exist in the financial statements. Furthermore, the downfall of Lehman Brothers depicts the loopholes in the statutory measures demanding an effective and strict guidance. Besides, it is very important for the policy makers like ASB (Accoun ting Standards Board), IFRS (International Financial Reporting Standards), and Basel to take into account the loopholes in the regulatory system to implement proper and stricter rules and regulations. Conclusion The downfall of Lehman Brothers offers stricter illustrations to all the companies irrespective of the fame to follow all moral standards in association with the corporate governance. Furthermore, it is the management and auditors duty to comply with the rules and regulations effectively. Moreover, the organizations must think and understand that such rules are made for their self-advantages because these are implemented by taking into account all the segments of financial issues necessary during the event of the drafting of financial statements. Nonetheless, it is the need of the hour that there must be an effective and proper reflection of the books of accounts in the companys financial statements. On a whole, it is primarily needed that the companies must prepare reports that can assist in avoiding misguidance to the stakeholders about the firms financial transactions. In such a scenario, the company must make steps to implement a proper way that can assist in the adoption of audi ting standards and statutory accounting practices. References Arens, A. A, Best, P. J, Shailer, G. E. P Loebbecke, J. K, 2013, Assurance Services and Ethics in Australia, 9th ed, Australia: Pearson. Elder, J. R, Beasley S. M. Arens A. A 2010, Auditing and Assurance Services, Person Education, New Jersey: USA Fox, J 2009, Three Lessons of the Lehman Brothers Collapse, viewed 19 May 2017 https://content.time.com/time/business/article/0,8599,1923197,00.html Ghandar, A Tsahuridu, E 2013, The Auditing Handbook 2013, Australia: Pearson. Hoi, C. 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