1) Introduce the company where the fraud occurred. Give the background and where the company is located.
2) Who are the players? Who committed the fraud, how, why, over what time-period. HOW DID THEY DO IT AND WHAT WAS THE MOTIVATION? What was the monetary damage? Address the fraud issues that you have learned in this class. Were the 3 elements of fraud from the fraud triangle present?
3) Who discovered the fraud?
4) What was the reaction by the company?
5) What happened with respect to internal control? Did it fail? Was it ever in place etc.?
6) What happened to the person/people who committed the fraud?
7) What changed in the company after the fraud...if there were any changes?
Lehman Brothers Accounting Fraud
Lehman Brothers Accounting Fraud
Lehman Brothers was a global firm based in New York. It was one of the largest investment banks in the United States offering financial services and was worth $600 billion, which was estimated as 5% of the word’s derivative engagement The company was a major player in sublime lending, leading in mortgage lending and loan scrutinization. However, the company collapsed in 2008, marking one of the major catastrophes that hit the US during the 2008 economic crisis (Sarno & Martins 2018).
In 2008, the investment bank registered huge losses of about $3.9 billion within a month in an attempt to dispose of its shares in one of its subsidiaries. These losses led to the close down of the bank's sublime lending, which was followed by a voluntary filing of bankruptcy a few days later. Many scholars have associated the fall of Lehman Brothers with other factors. Given the period in which the fraud occurred, some scholars believed that the accounting fraud occurred due to exposure to the 2008 financial crisis. The crisis saw a crumble of top global financial institutions into bankruptcy and liquidation, and Lehman Brothers was caught up (Juabin & Bawa, 2020). However, research has revealed that accounting fraud was the major cause of the investment bank. Lehman brothers sought to expand more, leading them to engage in fraud activities against accounting practices. The Lehman brothers' CEO, managers, and other executives were behind the fraud. The accounting fraud was done by hiding loans of up to $50 million and disguising them as sales on short-term bases to a bank in Cayman Island and buy back the assets (Mazzola, 2018).
Various features indicate accounting fraud in any business operation. Some of these include manipulated financial statements and misstatements of assets and liabilities. The fraud was discovered through some related practices in collaboration with their auditors, which led to further investigation by the Security and Exchange Commission (SEC). For an instant, it was discovered that despite the losses that the bank reported, the executives were receiving payments of excess bonuses in the prior years. In addition, the bank breached its risk threshold in real estate investment. The bank also manipulated its financial statements (Mazzola, 2018).
In the case of Lehman Brothers fraud case, the three elements of the fraud triangle are present. According to Homer (2020), the three elements of the fraud triangle include opportunity, pressure, and rationalization. First, the fraud under discussion occurred during a period in which the world was experiencing an economic crisis. This made the fraud more relatable as the economic crisis was blamed. Secondly, there was pressure to conduct financial fraud. The investment bank was under pressure to expand, which led them to engage in unacceptable financial practices. Lastly, there was rationalization. Rationalization includes the perpetrators' justification of the fraud action (Abdullahi & Mansor, 2018). After the fraud, the investment bank justified its fall by blaming extensive losses, which had led to the main business's closure and voluntary bankruptcy filing.
Lehman Brothers had internal controls in place. The bank utilized the board of directors as one of the internal control. The BOD included independent directors from diverse regions to ensure that the managers were kept in check. Other controls used corporate governance, which included a regulatory committee, audit committee, and other committees. However, these control systems failed as the CEO dominated the company as the state. The accounting fraud occurred due to management malpractices in collaboration with the auditing committee (Ceol, no date). The settlement of this accounting fraud took some years after its occurrence. First, the auditing firm Earnst and Young was charged with assisting Lehman Brothers in contemplating financial fraud through financial statement frauds. By the end of 2008, the bank’s executives were questioned.
The accounting fraud of the Lehman brothers had great monetary damage to both the company and the US market (Government Printing Office, 2008). The collapse of Lehman Brothers led to a drop in the Dow Jones Industrial Average (DJIA) by 500 points on September 15, 2008. After the markets reopened on September 11, 2008, DJIA lost 43% of its value, which decreased US market capitalization by 1 trillion. Finally, the scandal led to the company's bankruptcy, which led to its closure.
In conclusion, accounting fraud is a major challenge in the economy. Lehman Brothers are one of the major firms that collapsed due to accounting fraud in 2008. The fraud involved the company's executives and was detected major feature of fraud. The fraud had a major impact on the company since it ran bankrupt. Moreover, the fraud was a big hit to the US economy and the world.
Abdullahi, R. and Mansor, N. (2018), Fraud prevention initiatives in the Nigerian public sector: Understanding the relationship of fraud incidences and the elements of fraud triangle theory. Journal of Financial Crime, Vol. 25 No. 2, pp. 527-544. https://doi.org/10.1108/JFC-02-2015-0008
Ceol, C. (no date) Corporate Governance at Lehman Brothers. https://www.readcube.com/articles/10.2139%2Fssrn.3521073
Government Printing Office, (2008) the causes and effects of the Lehman Brothers bankruptcy. House hearing, 110 congress. https://www.govinfo.gov/content/pkg/CHRG-110hhrg55766/html/CHRG-110hhrg55766.htm
Homer, M (2020), Testing the fraud triangle: a systematic review", Journal of Financial Crime, Vol. 27 No. 1, pp. 172-187. https://doi.org/10.1108/JFC-12-2018-0136
Juabin, M.; Bawa, J.D. (2020) The Collapse of Barings Bank and Lehman Brothers Holdings INC: An Abridged Version. Preprints 2020, 2020070006 (doi: 10.20944/preprints202007.0006.v3).
Mazzola, P (2018) Power and Influence in the US Investment Banking Industry – a Case Study of Lehman Brothers. Doctor of Philosophy thesis, School of Accounting Economics and Finance, University of Wollongong, 2018. https://ro.uow.edu.au/theses1/379
Sarno, M & Martins, M (2018). Derivatives, financial fragility and systemic risk: lessons from Barings Bank, Long-Term Capital Management, Lehman Brothers and AIG. In Lippman, M (2009). Managing the bankruptcy of Lehman Brothers. International Tax Review, (49), 3-6.
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