LAW AND ACCOUNTING: DID LEHMAN BROTHERS USE OF REPO 105 TRANSACTIONS VIOLATE ACCOUNTING AND LEGAL RULES?

In September 2008, Lehman Brothers filed for bankruptcy. Lehman Brothers' bankruptcy was a critical event in the financial crisis. Prior to the bankruptcy filing, Lehman Brothers was able to use repurchase (Repo 105) transactions to disguise the true condition of the company. This paper addresses the use of Repo 105 at Lehman Brothers. At that time, the repurchase agreements were allowed to be counted as a sale rather than debt under Generally Accepted Accounting Principles; thus, Lehman understated their financial difficulties. Both the accounting principles, possible violations of U.S. securities law, and the conflict that results are examined. The authors conclude that as long as the conflict exists between what is expected of auditors (under accounting standards and GAAP) and the regulators and the law, Lehman-type events will continue to be likely. [ABSTRACT FROM AUTHOR]