Audit failure or lack of accounting candor? : the case of the Lehman Brothers

Abstract

The thriving of the global economy depends on the integrity of financial markets and the confidence of investors. External audits, as trusted monitoring mechanism, play a vital role in restoring the confidence of investors in financial information provided by public-trade entities. However, the recent financial institutions failures after issuance of unqualified audit opinions have cast doubt in the value of external audits. The aim of this paper is to evaluate the role of external audits in financial institutions and find the answer to the questions: to what extent are auditors responsible for failing to identify fraudulent financial statement and do financial standards contribute to audit failure? Lehman case analysis is used. The results indicate that Ernst and Young failure to discover potential fraudulent activity was partly contributed by the ambiguity in the accounting standards which may have in part biased the auditors’ judgment and decision process.