Building standards of ethical behavior is essential for public company. Otherwise, it causes accounting scandals and bankrupts. Over the last decade, there were a lot of enormous bankrupts that because of unethical behavior of investors and auditors. Lehman Brothers Holding Inc. is an example of accounting scandals. In this research paper, I am going to analyze this firm. Lehman Brothers Holding Inc. was a financial services firm and fourth-largest investment bank in the Unite Sates. It provided investment service for the clients and it founded in 1850.It mainly operated on trading sales, private banking, investment bank and investment management. The biggest turning point for the company is 2008 because it had credit crisis with 639 billion assets and 619 billion in debt. after that , Lehman Brothers Holding Inc. announced bankcrupt. There are several reasons caused Lehman Brother Holding Inc. downfall such as;, horrbile economic position, wrong investment, accounting fraud and unethics auditors. Lehman Brother Holding Inc. invested housing market for millions dollars at the beginning of 21st Century, however, housing market started to collapse in 2007. This circumstance made Lehman Brother Holding Inc. failed investment. In order to avoid company lost competitively in the Unites States market, Lehman Brother carried out “Repo 105” which tried to hide unhealthy financial statement and avoid selling assets. In addition, Ernst & Young failed to audit the real information to the shareholders and public. Even though the bad “Repo 105” aided company to keep good financial statement for a while, Lehman Brother still bankrupted because of the accounting fraud and credit crisis. Futhermore, investors and sharehoders also are re... ... middle of paper ... ...ehman Bros Investors. Retrieved October 18, 2013, from http://online.wsj.com/article/BT-CO-20131018-708546.html Sharp, A. (2010). Lehman Brothers' 'Repo 105' Accounting Scandal. Retrieved March 15, 2010 from http://www.wealthdaily.com/articles/lehman-brothers-enron-accounting-gimmicks/2375 Smith, C. (2012). Ernst & Young: Did they set up Lehman Brothers to Fail? Retrieved Ocober 31, 2012, from http://charlielsmith.blogspot.ca/2012/10/ernst-young-did-they-set-up-lehman.html Wikipedia. (2014). Lehman Brothers. Retrieved January 21, 2014 from http://en.wikipedia.org/wiki/Lehman_Brothers Wikipedia. (2013). Repo 105. Retrieved December 9, 2013 from http://en.wikipedia.org/wiki/Repo_105 Wolff, R. (2011). Lehman Brothers: financially and morally bankrupt. Retrieved December 12, 2011, from ehman Brothers: financially and morally bankrupt
The Savings and Loans Crisis of the 1980’s and early 90’s created the greatest banking collapse since the Great Depression in 1929. Over half the S & L’s failed, along with the FSLIC fund that was created to insure their deposits.
Ethics plays a vital role in developing accurate and high quality financial statements for management, financial institutions, and investors. As management utilizes financial statements to make decisions regarding the operations of the business, it is necessary to review accurate financial statements to make strategic decisions about the future of the organization. Investors and financial institutions require accurate financial statements to make informed decisions upon whether to invest funds into the organization or the wisdom of lending funds to said organization.
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.
The joint financial failures of the companies sparked a crash in the stock market. This served as a catalyst for a surge of bank failures because many New York banks were big investors in the Stock Market. The financial disaster began in New York and soon permeated its way throughout the country. Over a six-month period, over 8,000 businesses, 156 railroads, 400 banks failed, and 20% of Americans were unemployed By July of 1893, there was massive unemployment in factories and extensive wage cuts.... ... middle of paper ... ...currency.
Many people today would consider the 2008, United States financial crisis a simple “malfunction” or “mistake”, but it was nothing close to that. Contrary to what many believe, renowned economists and financial advisors regarded the financial crisis of 2007 and 2008 to be the most devastating crisis since the Great Depression of the 1930’s. To make matters worse, the decline in the economy expanded nationwide, resulting in the recession of 2007 to 2009 (Brue). David Einhorn, CEO of GreenHorn Capital, even goes as far as to say "What strikes me the most about the recent credit market crisis is how fast the world is trying to go back to business as usual. In my view, the crisis wasn't an accident. We didn't get unlucky. The crisis came because there have been a lot of bad practices and a lot of bad ideas". The 2007 financial crisis was composed of the fall of many major financial institutions, an unknown increase in mortgage loan defaults, and the derived freezing up of credit availability (Brue). It was the result from risky mortgage loans and falling estate values (Brue) . Additionally, the financial crisis of 2007 was the result of underestimation of risk by faulty insurance securities made to protect holders of mortgage-back securities from risk of default and holders of mortgage-backed securities (Brue). Even to present day, America stills suffers from the aftermaths of the financial crisis.
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).
Only a few top executives of Lehman knew about Repo 105; however, they did not disclose any information about Repo 105 in any reports or meetings. Neither the Audit Committee nor the Board of Directors knew about Repo 105. Most importantly, among eight members of Board of Directors except for the Chairman, most of them were in non-profit industry, and none of them was a financial service expert. The Board of Directors’ lack of experience caused them to fail to understand the complexity of financial markets and detect Repo 105. Meanwhile Richard Fuld, the Chairman and CEO, held 50% of beneficial ownership, and with his aggressive and risk-taking personality, he imposed the
Preston, A. (2012). You eat what you kill: from scandal to catastrophe, the rise and fall of the investment bank. New Statesman, 141, 22
Furthermore, he engaged the customer with an optimistic attitude and stated how the stock could affect him or her in the best way possible. Jordan could immediately hook any client into believing what he had to offer by providing the customer with the success stories others have had under his instruction.... ... middle of paper ... ... Works Cited Belfort, Jordan. The Wolf of Wall Street.
With every business activity come opportunities for fraudulent behavior which leads to a greater demand for auditors with unscathed ethics. Nowadays, auditors are faced with a multitude of ethical issues, and it is even more problematic when the auditors fail to adhere to the standards of professional conducts as prescribed by the American Institute of Certified Public Accountants (AICPA). The objective of this paper is to analyze the auditors’ compliance with the code of professional conduct in the way it relates to the effectiveness of their audits.
... 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.
But this time would be different. Henry Paulson stepped in to let Lehman Brothers know there would be no bailout for them. Someone had to fail to set an example for the rest of the banking industry and Lehman Brothers would be that someone. In Paulson’s view Lehman Brothers was guilty of moral hazardous decisions and would not be paid for mistakes made. I find it interesting that Richard Fuld the CEO at Lehman Brothers at this time was Paulson’s chief competitor before becoming Treasury Secretary. Why was Lehman Brothers by the way of Paulson’s moral hazard decision making? They were a large bank and posed greater systemic risk to the overall industry than Bear Stearns. Paulson told Fold to make a deal with another bank or risk bankruptcy. When no deal could be made Paulson told the Wall Street banks to solve the problem collectively since they created the problems collectively. With no end in sight Paulson eventually shelved his moral hazard standing and was forced to make loans to the largest banks in America. Two of the largest companies in the world were United States banks and had lost almost 60 percent of their value. United States banks held nearly 5 trillion in mortgages. AIG alone held billions in credit default swaps and would eventually need nearly 185 billion in government loans to remain in business. AIG famously was deemed too big to fail. The government now controlled the largest insurance company along with Fannie Mae and Freddie Mac the largest mortgage banks on
(Www.english.uiuc.edu) tells us that besides ruining many thousands of individual investors, this precipitous decline in the value of assets greatly strained banks and other financial institutions, particularly those holding stocks in their portfolios. Many banks were consequently forced into insolvency; by 1933, 11,000 of the United States' 25,000 banks had failed. The failure of so many banks, combined with a general and nationwide loss of confidence in the economy, led to much-reduced levels of spending and demand and hence of production, thus aggravating the downward spiral.
The panic of 1907 arose in the “trusts” where wealthy people saved their inheritances and estates. This kind of institutions did not have strict regulations -low reserve requirements and low cash reserve in comparison to the NB- since they wouldn’t risk the assets. Despite that trusts activities were determined, they speculated in the stock market and could pay high interests on the deposits. Trusts grew rapidly and joined the New York Clearinghouse where trusts should keep higher reserves than before. Due to that, trusts began failing causing a collapse in stock market. That era was known as the Panic of 1907.
There are many lessons a business owner can learn from the Andersen/Enron scandal, the only lesson would not be that honesty is the best policy, but also that a dishonest action made by a few people can affect many. Enron’s insider trading and failure to report accurate earnings and losses paired with Andersen’s failure to properly audit and report the company’s debts and earnings made for one of the biggest scandals that the business world has ever seen. Enron used SPE’s or Special Purpose Entities to mask the large amounts of debt that they had acquired overtime