Introduction to Lehman Brothers:
Lehman Brothers was the fourth largest U.S investment bank in 2008, when it underwent bankruptcy, at that time it had $639 billion in assets and $619 billion in debt with 25,000 employees working worldwide. Lehman Brothers have modest origins, its roots can be traced back to the small store founded by a German immigrant Henry Lehman in Montgomery, Alabama in 1844.In 1850, Henry Lehman and his brothers Emanuel and Mayer founded the Lehman Brothers. Taking a start from a small general store Lehman Brothers have walked through different eras successfully, though it faced many challenges on its way yet it survived, from the railroad bankruptcies in 1800s to the Great Depression of 1930s, from facing two world wars to the capital shortage in 1994. It even faced effectively the Long Term Capital Management collapse and Russian debt default of 1998. After coming out of all such disasters Lehman Brothers was helpless when it faced the Repo 105 accounting scandal which ultimately led to its bankruptcy in 2008.
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THE NATURE OF THE FRAUD AND THE IMPACT TO THE COMPANY AS A RESULT OF THE FRAUDULENT ACTIVITY:
The whole series of fraudulent activities started when Lehman Brothers entered into repurchase agreements with banks in the Cayman Islands. Under this deal Lehman would sell its toxic assets to the bank which later on it will repurchase, and that too in a short span of time. The idea behind this selling was to make the company look good on papers, a trick most often used to fool the investors and credit rating agencies. Though there are different banks that use such kinds of agreements all the time but what they do is that they make them enter as loans which Lehman Brothers did not do, instead they entered it as sales, thus misrepresentation of original agreement, and hence a fraud.
The ultimate impact of this fraudulent activity was that on September 15, 2008 Lehman Brothers filed for bankruptcy and it was the largest in history as its assets was far more than the previous bankruptcies of Enron and WorldCom. Moreover, it also induced the financial crisis that swept the global financial markets in 2008.
MANAGEMENT’S RESPONSIBILITY TO THE COMPANY STAKEHOLDERS TO PROTECT AND SECURE THE COMPANY FROM FRAUDULENT ACTIVITY:
Essentailly, what Lehman did was to make its balance sheet look more attractive by placing $50 billion in assets rather than in loans and adjusting the short term transactions at the end of each quarter; knowing this entirely, in one instance a senior vice president in Lehman alerted the management of possible falsifications in accounting records. But this was ignored by both the management and the Lehman auditors Ernest and Young. According to a report that followed the bankruptcy this warning was never mentioned or even raised in front of the board and everyone acted negligent of all that was going on in the company. The management thus failed to respond to the fraudulent activity.
THE CORPORATE ENVIRONMENT AND CULTURE THAT MAY HAVE CONTRIBUTED TO THE FRAUD:
Lehman Brothers moved $50 billion of toxic assets off- balance sheet to deceive the investors about its financial health, according to the bankruptcy’s examiner report that was released18 months after the collapse of Lehman Brothers revealed that the Lehman were actually working towards this whole scheme since the last quarter of 2007. That essentially indicates that the corporate culture and environment were conducive for such activities and moreover, even the auditors were unable to chalk it out the repo 105 scheme being cooked. What added fuel to it was the continuous desire for the management to maintain the Lehman Brothers in top 4 investment bank of America, this drive led them to engage in such activities.
THE IMPACT TO THE COMPANY OR THE BRAND AS A RESULT OF THE FRAUDULENT ACTIVITY:
The final blow to Lehman Brothers was when it filed bankruptcy, the fraudulent activity actually cost the life of the organization, the impact was deadly, life-taken and a lesson for others to learn. The reputation of the executives were ruined, the media continuously bashed the management for all that happened, even the external auditors were not spared for their negligence. The brand name of the company became a case study for the coming generations to learn from. Due to its extensive impact over the subprime mortgages the activities of Lehman Brothers caused a great shift in the global credit market, it may rightly be called a s an inducer of the crisis related to it.
THE MEASURES THAT COULD HAVE PREVENTED OR DETECTED THE FRAUD:
Though it is a responsibility of every employee to act in a fair and just manner, but the top management is more accountable for such deeds. It was their decision to misrepresent the facts in the balance sheet. If they had truly revealed the accurate amount of assets the whole scandal could have been avoided and Lehman Brothers would have existed today. It was their mere allocation of what was actually loan to the sales which caused the trouble. In order to make the balance sheet look healthier such act of fraud was done. The investors were fooled but for a short term and this caused them to lose everything in the long run. However, the external auditors Ernst &Young also exhibited irresponsible behavior in neglecting the alert from the management about the fraudulent activities, in addition it was actually their duty to go through all the records and look for possible frauds, but they remained unsuccessful, if they had shown a responsible behavior things would have been different today for Lehman Brothers.