Lehman Report Shows Creative Accounting

In a 2,200-page report released yesterday, a court examiner said that Lehman Bros.’ former CEO Dick Fuld, three CFOs, and auditor may be held liable for certain aspects of the company’s collapse, thanks to some artistic accounting. MarketWatch sums up the report’s most important findings:

The report cited a practice known internally as “Repo 105,” in which Lehman allegedly used repurchase agreements — the temporary exchange of assets for cash — that were structured as sales so that the leverage could be moved off the firm’s balance sheet…Lehman may have already been insolvent on Sept. 2, 2008, almost two weeks before its Sept. 15 bankruptcy filing rocked the financial world and helped send the stock market into a nosedive.

“…unbeknownst to the investing public, rating agencies, government regulators, and Lehman’s board of directors, Lehman reverse engineered the firm’s net leverage ratio for public consumption,” the report said.

A Reuters report quoted an attorney representing Fuld as saying the former CEO “did not know what those transactions were” and that “he didn’t structure them or negotiate them, nor was he aware of their accounting treatment.”

The Valukas report also said evidence exists to support a professional malpractice claim against Lehman auditor Ernst & Young, as the firm “took no steps to question or challenge the non-disclosure by Lehman of its use of $50 billion of temporary, off-balance sheet transactions,” according to the Journal.

Bloomberg Television has a good interview with former Lehman CEO Brad Hintz. I found Hintz’s comments about his former CEO Dick Fuld (they start at 4 minutes 45 seconds) especially telling. Hintz is careful when he talks about his former coworker, but does offer insight on how Fuld’s management style affected the company’s accounting. He also talks about Wall Street’s tendency to let minor statement incursions, for lack of better terms, slide.

(Video provided by Bloomberg Television)

Written by Drea Knufken

Currently, I create and execute content- and PR strategies for clients, including thought leadership and messaging. I also ghostwrite and produce press releases, white papers, case studies and other collateral.