Lessons for Internal Auditors From the Lehman Brothers Saga
The facts are still unfolding from the Lehman Brothers story. As a reminder, they filed for bankruptcy on September 15, 2008 - the largest bankruptcy filing in US history, with Lehman holding over $600bn in assets. You can read the background here.
- Are there any accounting practices that are intended only for “window-dressing” rather than business purposes? Have they been fully disclosed to the audit committee or board of directors? Do they affect the ‘fair presentation’ of the organization's results and financial condition? Do they affect any valuation or other assessment of the organization by investors and other stakeholders? Are they adequately disclosed in public filings?
- Does the audit committee or board of directors have an adequate process for assessing the quality of the external auditors? Do they have information on the experience and technical knowledge of the partners, managers, and senior staff? Do they receive objective feedback from management and internal audit?
- Is the level of non-audit services (i.e., services not directly required to the mandated audit opinion) a potential impairment to the objectivity of the external auditors and their willingness to raise issues with the audit committee or board of directors?
- Does the organization engage the external audit firm to assist or lead investigations? In the Lehman case, there are questions as to whether EY should have been asked to investigate the whistleblower’s assertions of inappropriate accounting. While some say these were forbidden internal audit services, for me the issue is whether they could have looked objectively at accounting policies and practices the audit partners had apparently accepted as compliant with US GAAP (SFAS 140).
Posted on Mar 26, 2010 by Norman Marks
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