Lehman and E&Y: The Examiner's Report Sparks a Flurry of Issues and Questions

If you haven’t already read at least the executive summary of the bank examiner’s report regarding Lehman Brothers' demise, you should. A New York Times story covers some of the main points and contains links to the 2,200-page document.

The news has triggered observers to ask some important questions, not only about the specific facts and circumstances, but about external auditing and accounting in the United States. Here are some, together with my own questions, for your comment and discussion:

  1. Is the annual audit still of value and how much reliance should be placed on it by investors and regulators? Some say that the Lehman example proves that the value is minimal.
  2. Are there sufficient provisions to ensure the independence of the external auditor?
  3. Is the board (including the audit committee) able to assess and manage the quality performance of the external auditors?
  4. Should internal auditors assess the quality of the external audit work?
  5. Do U.S. Generally Accepted Accounting Principles contain a requirement for "fair presentation" that trumps strict compliance with accounting standards? See my blog for more detail on this question.
  6. What do you think of the current situation?

Posted on Mar 15, 2010 by Norman Marks

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  1. There always seems to be one missing question. Are we too focused on financial information?

    Yes, would be my answer. A company should rather be valued for its effective selection and execution of strategy. Yes, the sleection of strategy is confidential; however, its execution could be measured by generic reporting on the formality by which objectives are set and managed. Reporting could be developed in a way to display vulnerabilities and risks that threaten acheivement thereby adding another dimention from which to set market value.

    We can keep holding financial reporting accountable for entity health!

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