Cooking the Books for Lehman?

N.Y. Attorney General Cuomo filed charges against Ernst & Young on December 21, 2010, alleging that the firm helped Wall Street Investment bank Lehman Brothers conceal its deteriorating financial condition before the bank’s historic collapse in the fall of 2008.  The civil lawsuit, which seeks more than $150 million, is the first law enforcement action to stem from Lehman’s failure. The bankruptcy of the firm, which was an important cog in the machinery of the capital markets, caused immense collateral damage. The allegations center on sham trades that allowed Lehman to window-dress its balance sheet before filing quarterly financial reports, making it seem like it had more cash than it actually did. Cuomo’s lawsuit aims to hold accountable one of the less-mentioned players in the saga – Ernst & Young, Lehman’s auditor, which allegedly turned a blind eye to the accounting machinations. The case does not resolve the fate of senior Lehman executives, such as former chief executive Richard Fuld, who have been under investigation by the Securities and Exchange Commission.

Questions:

1.  Explain the boomerang trade referred to as “Repo 105″ that is at the heart of the allegations.

2.  Explain leverage and what impact it played in the scenario.

3. Based on what you know about the Lehman situation, do you think they should have been included in the government bailout?  Why or why not?

4.  Read Matthew Lee’s letter  and critique it. Do you agree with the way he handled the situation as a whistleblower?  Based on what you know, would you have handled it any differently? 

Source:

Goldfarb, Zachary A. (2010). N.Y. Attorney General Cuomo Sues Ernst and Young, alleging Lehman Accounting Fraud, The Washington Post, December 22 (Retrievable online at http://www.washingtonpost.com/wp-dyn/content/article/2010/12/21/AR2010122103973.html?sid=ST2010122106931)

Lee, Matthew. (2010). The Lehman Whistleblower Letter Everyone Ignored. Hereisthecity.com, December 21, 2010 (Retrievable online at http://news.hereisthecity.com/news/business_news/10215.cntns)  

The Alyona Show,  The Next Arthur Andersen?, Dec. 22, 2010. (Retrievable at http://www.youtube.com/watch?v=5B_esTl9FS8&feature=related) 

New Revenue Recognition Standards on the Way for Contractors

Contractors should be educating themselves on the impact of the new proposed revenue recognition standards and the recently published (June 24, 2010) exposure draft pertaining to revenue from contracts with customers. Public comments are due October 22, 2010, and it is expected the standards will be finalized in 2011.

Questions:

1. What are some of the significant changes in this standard that will affect contractors?

2. How will the proposed standard define the economic unit of measure?

3. Explain what the new cost of capitalization rules will mean for contractors.

 

Source:

Henderson, J. (2010). Proposed Revenue Recognition Rules Would Significantly Affect Contractors, BKD Alerts, June (Retrievable online at http://www.bkd.com/industry/Construction-RealEstate/Insights/2010/2010-06alertsCRE-1.htm)

Small Discrepancies Grow Into a Giant Fraud

Satyam Computer Services, a leading Indian outsourcing company that served more than a third of the Fortune 500 companies, was at the heart of a huge 2009 fraud perpetrated through the significant inflation of earnings and falsification of accounts and assets for a number of years.  Chairman, Ramalinga Raju, resigned  in January 2009 after revealing that 94 percent or about $1.04 billion in assets were nonexistent and revenue was actually 20 percent lower than that reported.

Questions:

1. Who were Satyam’s auditors? What are some of the audit procedures that should have helped in the detection of this fraud?

2. What prior incident led to scrutiny of the company in October 2008?  What does this indicate to you about the corporate culture of the company?

3. Is Satyam still in business?  Provide a brief summary of its demise. What happened to the Satyam’s Chairman?

Sources:

Khanzode, R. (2010). Satyam Not out of Woods, Likely to Seek Time for Audited Results. The Financial Express, June 7. (Retrievable online at http://www.financialexpress.com/news/satyam-not-out-of-woods-likely-to-seek-time-for-audited-results/630308/)

Video (January 8, 2009). Satyam Auditor PwC Under Lens. (Retrievable online at http://www.youtube.com/watch?v=c_TvuhOtln0&feature=related)

 Timmons, H. (2009). Satyam Chief Admits Huge Fraud, New York Times, January 7 (Retrievable online at http://www.nytimes.com/2009/01/08/business/worldbusiness/08satyam.html)

Searching for Free Cash Flow

The South Africa-based company, Harmony Gold, is having problems securing ongoing funding after using up more than $1 billion U.S. Its latest quarterly report shows that the company is grappling to produce free cash flow.

QUESTIONS:

1. What is free cash flow and why is this a worry for the company?
2. With respect to free cash flow, why was it a good sign to analysts that Harmony paid its first dividend in five years on September 21, 2009?
3. Explain each of the following in terms of helping or hurting Harmony’s free cash flow position:
   1. Cash raised from selling residual shares in Gold Fields, after an earlier bid for the company failed.
   2. Incremental cash increases earned from the rising price of gold sales
   3. Significant projects to replace aging assets used in the mining process

SOURCE: Sergeant, B. “For Harmony Gold, Free Cash Flow Remains Elusive,” Mineweb – Gold News (Retrievable online at http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=91685&sn=Detail)