Lehman Brothers will more than likely go down in history as the firm that used misleading accounting practices, that were borderline illegal. The gray area, known as REPO-105 transactions, allowed Lehman to "legally" hide the firms financial difficulties.
Click Here for a detailed review of the tricky accounting practice.
The question facing firms today, is whether or not they need to adjust their accounting practices? How could it be legal for any firm to use these repo transactions in the first place? Is this not mis-leading investors?
Click Here to watch a funny overview by Jon Stewart :) He does a good job relating the Dodd reform bill, and the Lehman situation.
First Enron happened, and the Government responded with the Sarbanes-Oxley Act. Now, the "Financial Reform Bill" is pending legislation that will include supposed safeguards that will protect citizens from firms becoming "too big to fail."
Unfortunately, SOX didn't help avoid the Lehman downfall, and I highly doubt any new legislation with stop this unethical behavior. Especially considering the fact that what Lehman did is still considered "legal." What kind of example does this set for other firms and accounting departments? Well, they know the loopholes, and accountants will always be pushed to find the new loopholes within new legislation. This is a never-ending cycle.
The main problems in my opinion: Ethics.
"It's not ethically right, but it's technically legal."
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