The Lehman Brothers, an investment banking firm filed for bankruptcy in September of 2008 due to poor financial choices. The company made many bad decisions because of their greed and unethical decision to manipulate the books. The lack of success by the Lehman Brothers shows that it is imperative to be self-evident with financial reporting. The bankruptcy shows that they failed to use factual figures by disguising their actual financial position. The analysis of the Lehman Brothers will show the acts of unethical financial reporting and the effect it had on this financial banking firm. The trouble for the Lehman Brothers became apparent around the time the housing bubble burst. Lehman acquired more risk, ignoring the truth and began eliminating assets that were overvalued. They did not want to lose confidence from the investors, so they reported assets that had little to no value. “Lehman Brothers balance sheet grew rapidly beginning in 2006, and included many long-term investments financed through short-term borrowing”. (Examiners report, 2010 Vol. 1 pp.3-4) The unethical approach Lehman took by manipulating the books would lead any financial company to ruins. The repo 105 transactions that Lehman Brothers used accounted for sales, which permitted them to remove some assets and liabilities from the balance sheet; causing their leverage ratio to be lowered. Lehman elevated their repo 105 transactions around quarterly reporting to the (SEC) Securities and Exchange Commission to minimize leverage ratios. By doing this they showed compelling financial positions that actually did not prevail. Lehman collected cash by signing a short-term note payable and promised assets as ancillary for the loan. Lehman continued to ... ... middle of paper ... ...ecognizes that technical compliance with particular GAAP rules may lead to misleading financial statements, and imposes an overall requirement that the statements as a whole accurately reflect the financial status of the company.” (Examiner Report, 2010, Vol. 3, p. 964) The choices made in accounting masked the real issues causing bankruptcy to become the only alternative for Lehman Brothers. Reporting accurate financial statements will allow counterparties to make knowledgeable decisions, regardless of the outcome. In 2002 the Sarbanes-Oxley Act was enacted by Congress as a reaction to the large amount of business related scandals, it consists largely of new rules and regulations for public accountant firms in an attempt to reduce fraud in accounting practices. The consequences of disregarding this injunction could result in fine and imprisonment, or both.
On the surface, the motives behind decisions and events leading to Enron’s downfall appear simple enough: individual and collective greed born in an atmosphere of market euphoria and corporate arrogance. Hardly anyone—the company, its employees, analysts or individual investors—wanted to believe the company was too good to be true. So, for a while, hardly anyone did. Many kept on buying the stock, the corporate mantra and the dream. In the meantime, the company made many high-risk deals, some of which were outside the company’s typical asset risk control process. Many went sour in the early months of 2001 as Enron’s stock price and debt rating imploded because of loss of investor and creditor trust. Methods the company used to disclose its complicated financial dealings were all wrong and downright deceptive. The company’s lack of accuracy in reporting its financial affairs, followed by financial restatements disclosing billions of dollars of omitted liabilities and losses, contributed to its downfall. The whole affair happened under the watchful eye of Arthur Andersen LLP, which kept a whole floor of auditors assigned at Enron year-round.
After the time of financial crisis, JP Morgan was not the only national bank in US which got involved in trade of toxic loans related to mortgage. Before JP Morgan, it was Goldman Sachs-another large US Bank that faced the allegation of manipulating the trades in its own self interes, ended up in favor of SEC while GoldMan Sachs were asked to pay $500 Million during late 2011 in a deal called Abascus 2007-AC1 where the bank were alleged to mislead its investors on a deal related to Collateral Debt Obligation(CDO). (Eaglesham, 2011) The ab...
A possible flaw of Sarbanes-Oxley is it failed to put up any resistance in thwarting the financial crisis. While the degree to which fraudulent behavior can be traced to the roots of the Great Panic of 2007 will likely be up for eternal debate, it might be telling that Sarbanes-Oxley effectively did nothing. It seems this could indicate that stronger incentives for whistleblowers (such as Dodd-Frank and perhaps other whistleblower protection regimes) are very necessary given the extreme social costs. This conclusion may be hasty, however, given the short time period between the enactment of Sarbanes-Oxley and the crash. Not only is the status of Sarbanes-Oxley still in flux over a decade later, but one has to consider the substantial learning and switching costs associated with a regime with such a substantial ruach. Certainly, this is not to say that additional protections may in fact be necessary given the putative reluctance of lawyers to report fraud, but Sarbanes-Oxley likely needed more time to really crystalize and provide some level of predictability before it can be declared a bust.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
Market crashes are not a new phenomenon but the most disturbing fact about the financial crisis of 2008, was that it was self-inflicted. What started as a credit crunch during the early 2006, turned into a fully-blown recession by mid-2008.The world’s financial system received a huge shock in September 2008, with the collapse of The Lehman Brothers, one of the biggest global investment banks [3]. The Global Financial Crisis of 2008, was undoubtedly the worst economic slump since the Great Depression of 1930. While the bankers and financers hold the responsibility for the global economic turmoil, the business schools have also, being partially responsible, faced criticism.
Regulators claim that Paulson’s firm was allowed by Goldman to assist in designing a Collateral Debt Obligation (CDO) financial investment which was built from specific sets of mortgage assets that were risky hence essentially set CDO to failure. While all that was happening CDO investors were not told anything about the role of Paulson nor were they told about his intentions. In the year 2007 Mr. Paulson walked home with $4 billion for having bet correctly on the collapse of housing.
...lume basis. At Lehman Brothers, their own risk management department were constantly raising red flags which management overruled in order to seek more revenue. On December 12th 2013, The US Securities and Exchange Commission fined Merrill Lynch just over $130million for making false disclosures over 3 CDOs and holding inaccurate books. The banks believed the CDO machine couldn’t fail; they believed once they have sold on the toxic mortgages, it was no longer their problem. However, once the housing bubble burst, investors began to question the value of MBSs; there was a huge write down in their value, prompting huge losses in the financial sector. The long held myth that house prices do not decrease was found to be catastrophically inaccurate, and with the collapse of Lehman Brothers in September 2008, The Era of The Great Complacence was well and truly at its end.
"This is why the market keeps going down every day - investors don't know who to trust," said Brett Trueman, an accounting professor from the University of California-Berkeley's Haas School of Business. As these things come out, it just continues to build up"(CBS MarketWatch, Hancock). The memories of the Frauds at Enron and WorldCom still haunt many investors. There have been many accounting scandals in the United States history. The Enron and the WorldCom accounting fraud affected thousands of people and it caused many changes in the rules and regulation of the corporate world. There are many similarities and differences between the two scandals and many rules and regulations have been created in order to prevent frauds like these. Enron Scandal occurred before WorldCom and despite the devastating affect of the Enron Scandal, new rules and regulations were not created in time to prevent the WorldCom Scandal. Accounting scandals like these has changed the corporate world in many ways and people are more cautious about investing because their faith had been shaken by the devastating effects of these scandals. People lost everything they had and all their life-savings. When looking at the accounting scandals in depth, it is unbelievable how much to the extent the accounting standards were broken.
... middle of paper ... ... The forced liquidation of some $3 trillion in private label structured assets has been deprived from the financial markets and the U.S. economy has obtained a vast amount of liquidity that the banking system simply cannot restore. It is not as easy to just assign blame within these cases, however it is noted that the credit rating agencies unethical decisions practices helped add onto the financial crisis of 2008 and took into account the company’s well-being before any other stakeholders.
In November 2007, the housing market in the United States started to take a downward turn. With loan defaults on the rise, the loans on Citigroup’s books were overdue for a revaluation. Due to the housing market decline and consumer spending cuts, Citigroup announced they expected to post a loss of between 6 and 11 million dollars. Citigroup’s stock plummeted. (Reference)
Accounting fraud refers to fraud that is committed by a company by maintaining false information about the sales and income in the company books, when overstating the company's assets or profits, when a company is actually undergoing a loss. These fraudulent records are then used to seek investment in the company's bond or security issues. By showing these false entries, the company attempts to apply fraudulent loan applications as a final attempt to save the company by obtaining more money from bankruptcy. Accounting frauds is actually done to hide the company’s actual financial issues.
Financial distress is often expressed as the force that drives most of the corporate decisions. However, many researches argue that there is weak comprehension of the duties of and connections between corporate illiquidity and insolvency; the most important two causes of financial distress.
Financial reporting is an example of an ethical problem for an organization or business. Many busin...
The fraudulent financial reporting is the information in financial statement that will misleading, omission, and misrepresenting the users in order to attract potential investors and fulfil the shareholder’s expectation wealth. The company may has intended to use wrongly the accounting principle which related to classification, method of depreciation,
This paper discusses the role of ethics in corporate governance. I seek to show the application of moral and ethical principles in corporate governance. Ethics is a topic that has generated a lot of interest in the last decade especially after high profile scandals. The failures of prominent companies such as WorldCom, Enron, Merrill lynch and Martha Stewart portrays the lack of corporate ethics. The failure of such business has seen an increased pressure to incorporate ethics in corporate governance. The result of corporate scandals has been eroding investor and public confidence. The entire economic system has experienced some form of stress from loss of capital, a falling stock market and business failures.