Lehman Brothers Accounting Scandal: An Ethical Analysis Paper

In the contemporary dynamic climate, fraud is currently a concern for businesses. Globalization has resulted in fierce competition among major companies for profits and dominance in the market. Stock prices are viewed as an indicator of business performance, causing managers to worry and resort to undesirable purposeful behaviors that lead to fraud. Fraud is a deliberate action by single or multiple individuals among management, officials entrusted with administration, workers, and other parties, including employing methods of dishonesty to gain an unfair and illegitimate benefit. This paper will critically analyze Karim’s (2021) article on Lehman’s accounting scandal. In addition, the paper will support the article’s position on the global corporation and provide the rationale for agreeing with the outcome. Also, the paper will outline various recommendations related to the issue.

Lehman’s Case

Lehman Brothers was a multinational financial corporation that offered investment banking, trading, and brokerage services, among others. It was the country’s fourth-largest investment bank. Its demise is considered to exacerbate the 2008 financial crisis. Despite the company’s financial strength and stability in 2007, Lehman encountered challenges in early 2008. The company was unable to generate sufficient funds for necessary activities such as repaying its debts. The issue worsened as a result of a large migration of consumers and significant stock value declines. Furthermore, the bank was unable to find an effective partnership for acquiring some of its businesses. On September 15, 2008, the company filed for Chapter 11 bankruptcy protection, with $639 billion in assets and $613 billion in debts.

The Rationale for Supporting the Article’s Position

Based on the above case, I support the article’s position on the corporation and I agree with the outcome. The collapse and bankruptcy of Lehman Brothers could be linked to ethics. The company was supposed to follow five ethical principles, according to Karim (2021). Integrity, due care, professionalism, confidentiality, and professional competence are examples of these. Yet, the bank’s management proceeded to break the rules by manipulating accounts. Lehman’s collapse demonstrated a clear connection between regulations and management decisions. The bank’s bankruptcy, especially, shows that regulation is vital to the profitability and sustainability of any business. As a result, strict oversight of certain company performance measures such as solvency, liquidity, and profitability is required. Furthermore, various intricate factors led to Lehman’s downfall. Such factors include unethical management practices, deregulation, excessive risk-taking, poor corporate governance structure, fraud, and lack of a robust ethics code.

Lehman Brothers’ failure is among the most significant crises in US financial history. However, the situation may have been avoided. For example, the bank’s failure would not have been possible if the US government had not overturned the Glass-Steagall Act of 1933 (Karim, 2021). The legislation would have made it illegal for Lehman to engage in risky security trading or investment banking. Furthermore, the statute would not have enabled Lehman to get too large, exposing it to the too-big-to-fail challenge. Furthermore, the article revealed that a strong corporate oversight system may have avoided insolvency. I support this since effective corporate oversight, in specifically, would have assured that Lehman was effectively formed and independent.

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The company’s management would have overseen and closely supervised the bank’s activities. A solid oversight structure would have also hampered the executive’s capacity of manipulating the financial records utilizing Repo 105 transactions (Karim, 2021). Finally, Lehman could have prevented bankruptcy if the US government had bailed it out. The bailout funds would have been utilized to support business activities and keep the bank solvent during the crisis. The failure of Lehman Brothers demonstrates the need for regulation and ethical management in ensuring a company’s survival. According to the analysis, the removal of the Glass-Steagall Act in 1933 gave an incentive for banks to participate in a high-risk-taking culture, which contributed to Lehman’s failure.

Recommendations

Suppose my company faced a similar circumstance in which charges of misconduct occurred, I would take swift action to rectify the problem to avoid any further harm. Based on Mangala and Kumari’s (2015) research, I would propose various suggestions to my business entity. First and foremost, I would improve compliance and ethical behaviors. This would entail stressing the significance of securities law compliance and ethical business practices throughout the company (Mangala & Kumari, 2015). Following that, I would create comprehensive instruction programs to make sure every staff understands their role in ensuring honesty and openness. Furthermore, I would put in place solid internal control mechanisms to oversee financial reporting and assure reliability and accountability. Audits should be performed regularly to detect and reduce risks.

Additionally, the other recommendation would be to encourage workers and interested parties to bring to light any suspicious misbehavior or unethical activity and expose possible concerns inside the business by developing a safe and private reporting process. In addition, I would involve independent auditors frequently to execute rigorous financial audits to give an unbiased examination of the business’s accounting records and limit the danger of misleading accounting. Also, I would promote free and transparent communication with investors and stakeholders. This would involve disclosing cash flows, major incidents, and any significant modifications that could influence the organization’s activities or performance in a timely and reliable way (Mangala & Kumari, 2015). The last suggestion would be to build a constructive relationship with regulatory organizations and take part in proactive conversations. This will establish the firm’s dedication to conformity and make the regulatory process go more smoothly if any difficulties emerge.

To prevent such tragedies, there is an immediate necessity for more oversight. Organizations must also undertake stress tests regularly, identify potential hazards, and utilize strategies to mitigate such risks. Accounting procedure changes are additional approaches that could assist avert failure. Since Repo transactions were not considered unlawful in the case of Lehman, the bank successfully employed them. However, accounting agencies such as the FASB and IAS must establish regulations that render earnings management hard for corporations to engage in (Mangala & Kumari, 2015). For starters, most businesses alter their books by exploiting accounting rules’ flaws. As a result, governing bodies for accounting should develop strategies to close gaps in accounting standards. For instance, Mangala & Kumar (2015) state that financial oversight bodies like the Securities and Exchange Commission (SEC) and the Financial Conduct Authority (FCA) should also impose strict procedures to prevent auditing companies from assisting companies in deceiving investors.

Corporations could also avoid questionable practices by strict adherence to ethical standards. In Lehman’s case, the corporation had established an ethics code that pertained to all workers. The code, however, was ineffective since top executives were not in favor of it. For example, the CEO chose to participate in unethical accounting techniques, in violation of the code. He also exploited the Repo 105 system in an unorthodox and unethical way to obtain financing by portraying accounts as healthier than they were (Mangala & Kumari, 2015). To govern conduct, businesses should also adopt an internal code of ethics based on values such as confidentiality, professional competence, objectivity, honesty, and professional behavior. Furthermore, the code should be endorsed by executives and incorporated into the company’s overall strategy.

Companies should also create solid corporate oversight structures to avoid the risk elements that led to Lehman’s failure. Regarding the case of Lehman, the bank’s corporate governance framework was inadequate to protect it from overexposure to risk. For example, the bank’s board of directors lacked independence and professionalism (Mangala & Kumari, 2015). As a result, the bank was unable to independently verify its activities and ensure that they were conducted ethically. A strong corporate governance framework, on the other hand, could reinforce the board’s position and make certain it is autonomous and suitably formed. The system of oversight ought to incorporate concerns such as conflict of interest, insider dealing, and integrity. A strong corporate governance framework must guarantee that a qualified board of directors provides supervision and that an effective risk management culture exists.

In general, a strong governance structure helps protect businesses from excessive risk-taking and bankruptcy. Finally, authorities should invest in and use modern technologies to gain a better understanding of businesses. For example, investments in big data and analytics can assist regulators in detecting dangerous operations and intervening to prevent bankruptcy (Mangala & Kumari, 2015). Businesses must additionally take advantage of cutting-edge technologies to improve their risk management operations. Machine learning and artificial intelligence should also be implemented by firms to evaluate risks, optimize operations, and avoid fraud and other dangers.

References

Karim, M. A. (2021). Failure of Lehman Brothers. Journal of Finance and Investment Analysis, 1–14. https://doi.org/10.47260/jfia/1041

Mangala, D., & Kumari, P. (2015). Corporate fraud prevention and detection: Revisiting the literature. Journal of Commerce & Accounting Research, 4(1), 35-45.