A loophole in financial accounting: A detailed analysis of Repo 105

Abstract

From 2000 to 2008, Lehman used repo transactions to hide billions of dollars on their statements. They also misrepresented the repo transactions as "secured borrowings" even though they actually recorded the transactions as sales. Valukas' report in 2010 stimulated an extensive coverage of the repo transactions and spurred an array of studies addressing issues related to the collapse of financial institutions. Since the Repo 105 maneuver of Lehman provides a good example on how regulatory deficiencies can induce companies to obscure financial reporting and the importance of ethics in deterring these abuses, our study intends to examine repo transactions related accounting standards, illustrate how repo transactions can enhance a bank's financial statements, and discuss the importance of business ethics in curtailing accounting irregularities. © 2011 The Clute Institute.