Lehman Brothers Holdings, Inc. 1) Ernst and Young was acting as the independent auditor for Lehman and not as consultant. Therefore, I do not feel that Ernst and Young had a direct responsibility in being involved with the developmental process of the Repo 105 accounting policy.

The party who would be labile for implementing Repo 105 would be management and not the independent auditors. AU 110 discuses responsibilities and functions of the independent auditor, it clearly states how management is in charge of creating accounting policies and not the external auditors. The role of the auditor would come in after the accounting policies have been made by management, it would be there job to evaluate the policies that were set in place and to make evaluations on whether or not everything complied with GAAP, that no illegal accounting tactics were being used, and that due diligence has been applied to the audit. Where the auditor did fail, was that they had received a whistleblower letter from a former employee about how certain liabilities were severely misstated and they failed to bring that information up to the audit committee on two separate occasions.

2) To me, intent does matter and I disagree with the assertion that “intent does not matter”. I do not think that reporting entities should be allowed to allowed to use approved exceptions for the purpose of embellishing the financial statements because it deceives people. Even if you find what can be called a “loophole” like Lehman did with Repo 105, it is still deceiving anyone who looks at the financial statements of the company. In this instance, what you see is not what you are getting. This is not fair to investors, creditors, lenders, and other related parties. It does not do any good to anyone except the internal management team and its upper level employees because it will affect how much of a bonus they will get and will put them less in the hot seat because the financials are meeting or exceeding expectations due to the loophole. In the long term it does much more damage than good because of the manipulated practices that drive these decisions that are made with bad intent. 3) Yes, auditors do have a responsibility to determine if transactions made by the client are “accounting-­‐motivated”. It might not be a direct responsibility over the course of the audit, if an auditor was to catch something that was a little sketchy like seeing an odd number of Repo 105 transactions at year end, they are going to want to look into that situation and determine what the clients motive is for that specific reaction. If they were to determine that it was a manipulative practice, it should be further investigated.

4) I would assume that Schilich had reviewed the letter at one time. Even if it was to be handled by Ernst and Young Great Britain, as the lead US engagement partner he had to realize that if any issues did arise that you he would be next in line for the blame. He needed to be well versed in this accounting tactic and the letter would have helped him, and ultimately he should have reviewed the latter because he had to know that eventually they were going to be consolidated into Lehman’s financial statements that were going to be issued in the United States. Since they were going to be consolidated either him or his subordinates should have read the letter because it does have relevance to the US audit.

Multinational audit engagements can be a tricky task. As we have seen in this case, something can be approved in another country and illegal in another. It is crucial for the teams to work hand in hand to make sure that the firm wont face any legal issues that can come across with dealing with two different standards. They should have a strategy set in place when dealing with issues like Repo 105 and ways to deal with it. If the US team would have put there foot down and said since it cant be approved in the US, we don’t want to have it on the United States consolidated financials because of the legal ramifications that would take place in the future.

5) Even though the net leverage ratio was not reported within the audited financial statements the auditors still should be responsible for the accuracy of a ratio like this because the elements that are factored into the ratio (numerator/denominator) are numbers that are in the audited financial statements. AU 312 deals with audit risk and materiality/misstatements that can arise when conducting an audit. The independent auditors are responsible for the accuracy of the MD and A section and annual report because they are both part of the financial statement.

6) I do believe that the change in net financial ratio of 17.8 to 16.1 at the end of the fiscal year of 2007 to 2008 was a material difference. In the planning stages of the audit, one of the main focuses is for the independent auditors are to know the internal and external environment of the client. During 2008 with the housing crisis and increasing number of Americans going under water on there homes, any type of business (including mortgage backed securities) should have been looked at with a bit of a closer eye. Now materiality was set at 1.8B but the reason that the net financial ratio changed by the 1.6 percent was because the Repo 105 transactions allowed them to move $50B off the books. That $50B number is a material number. So that is why I believe that the difference of change is material because the reason for the change was material as well.

7) Whistleblower allegations should be looked into and taken very seriously by the independent auditors. The situation should not be handled like Ernst and Young handled it when they decided to hold back key whistleblower information for the Lehman audit committee. AU sections 326 states that that whistleblower allegations are not to be considered audit evidence. Even though it might not be able to be used as evidence, a investigation should be conducted by the audit team and audit committee to further look into the situation. During that investigation, it could be possible that some relevant evidence could come up that could be relevant to the audit staff and used in the audit.

8) According to the Securities and Exchange act of 1934 investors have the right to sue when they feel that an auditor has acted negligent that has lead to a mis-­‐ statement of the financials. It is my understanding that investors can team up and file a class action law suit against that auditor that might have acted unprofessionally. That would be on the federal basis, other suits could have came up in New York state where Lehman Brothers was located, and if other suits arose in other states they will be each handled according to that states law and how they would deal with a reckless act by the independent auditors.