Lehman Brothers, a leading investment bank in the United States (U.S) filed for bankruptcy on 15th September 2008. The firm had assets worth $639 billion while its debts stood at $619 billion. This made the bankruptcy filing the largest in the U.S history (Moody, 2013). The impact of Lehman’s collapse was immense. For instance, it led to an intensification of the 2008 crisis. Also, in October the same year, the collapse resulted in the loss of about $10 trillion worth of market capitalization from equity market globally. Owing to the firm’s size and its market size globally and in the U.S, the impact of the collapse shook the global financial markets. Despite the various reasons given for the collapse , accounting fraud was a key driver of the collapse.
The collapse of Lehman Brothers can be explained using the fraud triangle which explores the three stages that a n employee undergoes when tempted to carry out a fraudulent activity. First, th e employee is under pressure to commit the act. Secondly, he or she exploits an available opportunity, and lastly, the employee rationaliz es his or her action (Mansor, 2015). Lehman Brothers accounts were characterized by alterations in both quarterly and yearly filings (Moody, 2013). The firm recognized that there was a gap in the accounting standard language especially regarding repurchase agreements ( repos ). Subsequently, it took advantage of this. For these asset transactions, the firm did not record liabilities. Rather, assets were struck off the balance sheet and the money raised used to repay other debt. This lowered the firm ’s leverage tremendously. To cover up, Lehman Brothers sought the help of a United Kingdom (U.K) legal firm to give an okay to the activities . This was against the U.S accepted accounting standards. Subsequently, the bank started accumulating immense amounts of debt. Accounting fraud is common in the banking sector, in which case the repercussions of wrong investment decisions are hid d e n from investors via misrepresented books of account . These actions are not only costly to the firms but also their investors. While the former may collapse, the latter lose massive amounts of investments.
Delegate your assignment to our experts and they will do the rest.
Owing to its fraudulent activities, Lehman did not receive a bailout from the U.S government. Interestingly, despite examining its accounts, no one was indicted by the Securities and Exchange Commission (SEC) (Moody, 2013) . This shows that accounting fraud is not dealt with comprehensively. Nevertheless, a ccountants liable and signatory to these acts are prosecuted under the law and their membership in accounting bodies revoked as seen with the CEO of Lehman Brothers. Managers are also sued for defrauding the company, and the transaction trail is followed to identify the culpable employees . To facilitate prevention and detection of accounting fraud in the future , there is a need to intensify m onitoring of companies’ financial books once results are posted . Likewise , stringent checks and balances should be put in place targeting accountants, auditors, and regulators.
References
Mansor, N. (2015). Fraud Triangle Theory and Fraud Diamond Theory. Understanding the Convergent and Divergent For Future Research. International Journal of Academic Research in Accounting, Finance and Management Sciences , 1 (5), 38-45.
Moody, M. (2013). Lehman Brothers: Accounting Left to Interpretation. Retrieved from http://www.fraudconferencenews.com/home/2013/6/24/lehman-brothers-accounting-left-to-interpretation
