Lehman Brothers Holdings Inc. had to file for bankruptcy in September 2008, following the
loss of most of their clients, decrease in assets, and losses of stock, due in part to the declining market
at the time. In March 2010, a report by a court-appointed examiner found that the financial services
firm had been participating in accounting gimmicks. Lehman Brothers took place in an accounting
gimmick know as “Repo 105”. This gimmick was used to make it look like they were cutting their
leverage levels in 2008, when in actuality they were not. They used this technique to even remove $50
billion in securities from their balance sheet in 2008. Lehman would do this at the end of each quarter.
The examiner also found that Lehman could have been insolvent for two weeks prior to their
September 15 bankruptcy filing date. The examiner stated “Lehman's small margin of equity relative
to assets meant it did not need much loss in asset value to render itself insolvent.” Of course
Lehman's auditor, Ernst and Young; did not escape the criticism from Lehman's fallout. The examiner
said that it's possible Ernst and Young could be held “negligent” in the case. Ernst and Young said in a
statement: “ Our last audit of the company was for the fiscal year ending November 30, 2007. Our
opinion indicated that Lehman's financial statements for that year were fairly presented in accordance
with General Accepted Accounting Principles (GAAP), and we remain of that view.”
Along with the Lehman Brother's scandal, WorldCom had it's own scandal in 2002 when they
filed for bankruptcy. Just like the case with Lehman Brothers, fraud and accounting gimmicks were
found to be evident in the demise of the company. WorldCom was an American telecommunications
company, and for a time was the nations second largest long distance phone company after AT&T.
After a steady rise in the telecommunications industry, WorldCom hit a snag in 2000, and saw its stock
prices declining. The CEO at the time; Bernard Ebbers was looking for a ways to cover his margin
calls on his WorldCom stock, with pressure from banks to do so in order to finance some of his other
business expenses at the time. Ebbers achieved a rise in WorldCom's stock prices from 2000 to 2002,
by using accounting gimmicks to hide the steady drop in their earnings and by distorting their actual
profits and falsely presenting a pretty picture of the company's financial statements. WorldCom
achieved this by using two main accounting gimmicks. The first gimmick they used was improperly
capitalizing cost instead of expensing them on the balance sheet. They would under-report their 'line
costs', or the costs for inter-connection with other telecommunication companies; by capitalizing them.
Secondly, WorldCom would increase their revenues with manufactured accounting entries from
“corporate unallocated revenue accounts.” WorldCom's fraudulent financial revenue and growth was
finally discovered in 2002 by a team of internal auditors at the company. In the end, the audit team,
who did their work in secret, found $3.8 billion in fraud. On June 26, 2002, the U.S. Securities and
Exchange Commission launched their investigation into the matter. Over a year later, it was discovered
that WorldCom's assets were inflated by around $11 billion.
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