Case Study Analysis-Lehman Brothers Company

Case Study Analysis-Lehman Brothers Company

Company’s History

Henry Lehman and his brothers, German immigrants, established the significant American financial services company Lehman Brothers in 1850. The corporation had its headquarters in New York City. It served clients worldwide by offering a wide variety of financial services, such as investment banking, asset management, and securities trading. Lehman Brothers developed throughout its lengthy history to become among the world’s biggest and most reputable banking institutions (De La Merced & Sorkin, 2010). Lehman Brothers eventually went down in September 2008, shocking the financial world and starting a worldwide financial crisis despite its lengthy history and stellar reputation. Many inquiries into the cause of the company’s demise and those accountable for it were made in the wake of its demise.

Moreover, it is crucial to look at the history and performance of the firm before the crisis to comprehend the elements that led to the collapse of Lehman Brothers. The Lehman brothers established a modest cotton trading company in Montgomery, Alabama, after coming to America from Bavaria in the middle of the 19th century, which is when the company’s origins may be identified. The business expanded and diversified over time, eventually branching into investment banking and securities dealing. Lehman Brothers maintained its business growth throughout the 20th century and became one of Wall Street’s most important financial institutions (De La Merced & Sorkin, 2010). As the high-yield bond market, commonly called the junk bond market, grew in the 1980s, the business was a major contributor. Debt instruments with high risk and returns issued by organizations with subpar credit ratings dominated this market. Although the junk bond market aided in economic expansion and job creation, it also sparked a surge of corporate takeovers and leveraged buyouts, which some detractors claimed were detrimental to employees and the overall economy.

Despite these worries, Lehman Brothers remained successful throughout the 1990s and the beginning of the 2000s. The business saw consistent growth in its income and earnings, and it was widely considered one of the most successful financial institutions in the whole globe. But there were indications that disaster was approaching. The business started to grow its exposure to the subprime mortgage market in the early 2000s, defined by high-risk loans given to customers with bad credit histories (De La Merced & Sorkin, 2010). Lehman Brothers first saw the subprime market as a lucrative opportunity but later became a significant risk and uncertainty source. The subprime mortgage industry started to break apart in 2007 and 2008 due to a wave of foreclosures, decreasing property values, and growing default rates, which also caused a dramatic reduction in the value of mortgage-backed securities. Lehman Brothers was severely impacted since it had made significant investments in these securities and was highly exposed to the subprime market. Lehman Brothers attempted to shore up its finances in the months before its collapse by obtaining extra money, but its attempts eventually failed.

Lehman Brothers declared bankruptcy on September 15, 2008, setting off a worldwide financial crisis with far-reaching effects on the global economy. Investors worldwide started to worry and pull their money out of the markets due to the collapse of Lehman Brothers, which sent shockwaves through the financial industry. Banks were unwilling to lend money to one another as a result, which caused a wave of bank failures and a dramatic contraction in the credit markets (De La Merced & Sorkin, 2010). Therefore, numerous factors contributed to the demise of Lehman Brothers, including the firm’s extensive involvement in the subprime mortgage market, its excessive risk-taking, and its reliance on complicated financial products that were hard to evaluate. However, the company’s use of accounting ploys and financial engineering to hide the actual status of its finances was one of the major elements that led to its demise.

Weakness within the Company

Lehman Brothers covered up the fact that it depended on borrowed funds by using a number of accounting tricks, which resulted in a significant financial misrepresentation. One of the most infamous tricks was a financial engineering plan known as “Repo 105,” which temporarily moved $50 billion of assets off its records in the months moving towards its downfall to hide the precarious status of its finances. Executives from Lehman Brothers were aware of the program, as were the bank’s Ernst & Young accountants. According to the audit, bank executives made “actionable balance sheet manipulation” and “nonculpable errors of business judgment.” Former Lehman CEO Richard S. Fuld Jr. admitted to approving the false statements and was at least grossly negligent. Although the case does not reach any findings on whether Lehman executives broke securities laws, it makes a case for possible civil claims that there is sufficient evidence.

The case talks about the accounting tricks, which entailed transactions that covertly transferred billions of dollars off the accounting books of Lehman at a time when the bank was under intense criticism. Conferring to the report, the financial records of Lehman for the fiscal year that ended on Nov. 30, 2007, were fairly presented in accord with normally acknowledged bookkeeping values (GAAP). Still, it appears the bank used aggressive accounting in its Repo 105 trades to insincerely and momentarily reduce the company’s debt levels. The accounting move had the effect of hitting specific goals and making the company look healthier than it actually was (Dominey et al., 2010). The company’s fraudulent operations seriously impacted its stakeholders, causing a series of failures that ultimately forced Washington to organize a comprehensive rescue of the country’s financial system.

Information on the Environment

Lehman Brothers’ deception, which was eventually discovered, was made possible by materially deceptive accounting tricks employed to conceal the poor investments that ultimately brought about the collapse of the business. To hide its reliance on leverage or borrowed money in the months moving towards its collapse in September 2008, Lehman employed what may be considered financial engineering to temporarily move $50 billion in assets off its accounts. The actions were known to senior Lehman officials and the bank’s Ernst & Young accountants. The nine-volume study is mostly devoted to the accounting tricks, sometimes referred to as “Repo 105” within Lehman.

Lehman appears to have arranged its Repo 105 transactions in a way that involved selling securities towards the end of the quarter with plans to repurchase them a few days later. This is an example of aggressive accounting. To meet particular goals, accounting temporarily and falsely lowered the business’s debt levels, giving the impression that the firm was in better shape than it actually was (Hubbs, 2012). Anton R. Valukas, a former federal prosecutor and chairman of the law firm Jenner & Block, was chosen by the United States Trustee in the case in January 2009 to look into the reasons behind the Lehman bankruptcy and determine whether any fraud or misconduct occurred, conducted an investigation that led to the discovery of the fraud.

Analysis of the Findings

The 158-year-old financial bank Lehman Brothers filed for bankruptcy in 2008, marking the biggest bankruptcy in American history. The bank’s problematic mortgage assets and demands from rivals like JPMorgan Chase and Citigroup that it put up security for loans it sorely needed were the causes of the bankruptcy. Lehman Brothers utilized accounting strategies to conceal its reliance on leverage or loaned out cash, according to a study by bank examiner Anton R. Valukas. The investigation claims that Lehman utilized what amounted to monetary engineering to momentarily move $50 billion of assets off its financial records in the months leading up to its collapse in September 2008 in order to hide its reliance on borrowing. Lehman officials made “nonculpable errors of business judgment” and “actionable balance sheet manipulation,” according to the study. Regarding whether Lehman executives broke securities laws, the study makes no judgments. But it does imply that there is sufficient proof for prospective legal claims. The investigation focused particularly on accounting tricks referred to as “Repo 105,” which include transactions that covertly removed billions of dollars from Lehman’s books at a time when the firm was under intense scrutiny. Lehman set up these transactions such that it would sell the securities at the end of the quarter and then arrange to purchase them again a few days later. Accounting had the effect of temporarily and artificially lowering the business’s debt levels in order to meet certain goals, giving the impression that the firm was in better shape than it was (Lurigio, 2023).

Lehman Brothers’ flaws were its reliance on borrowed funds and the manipulation of the balance sheet. The business was at risk of going bankrupt because of these flaws. Lehman Brothers’ vulnerability came from its use of Repo 105, which allowed it to conceal its reliance on leverage. Holdings of subprime mortgages and requests from rivals like JPMorgan Chase and Citigroup for collateral against loans that the bank sorely needed were risks that led to Lehman Brothers’ demise. The use of Repo 105 and the modification of the balance sheet presented opportunities for fraud. Through these strategies, Lehman Brothers was able to portray itself as healthier than it was, giving investors and other stakeholders the impression that the bank had a solid financial situation when it did not (Marquet, 2011). According to the research, there is enough proof to support prospective legal lawsuits against Lehman officials and Ernst & Young, the bank’s auditors. Lehman Brothers used accounting tricks to conceal the precarious status of its finances, which ultimately caused the company to fail.

Analysis of the Systems and Evidence Found

The case of the fall of Lehman Brothers provides stunning new information on the financial deception the bank employed to hide its reliance on borrowed funds. Lehman’s management utilized “Repo 105,” a financial engineering strategy, to remove $50 billion from its books and make it appear as though the bank had decreased its debt levels to meet predetermined goals. This ruse was employed to make the bank look better off than it was. Both the Lehman management and the bank’s Ernst & Young accountants were aware of these actions. The study makes the case that there is sufficient information to support prospective civil lawsuits, but it does not make any judgments about whether Lehman officials broke securities laws.

The former CEO of Lehman Brothers certified false accounts and showed “at least gross negligence.” The study also accuses three former Lehman senior financial officers, Ian Lowitt, Erin Callan, and Christopher O’Meara. The accounting firm gave the bank an unqualified opinion on its financial accounts for the fiscal year that ended November 30, 2007, which raises concerns about the role Ernst & Young had in Lehman’s collapse. According to the research, “colorable claims” might be leveled at some former Lehman officials as well as Ernst & Young. The report’s conclusions may aid creditors and prompt more inquiries into the Lehman Brothers bankruptcy.

Forensic Recommendations and Outcomes

Accounting tricks can be used to conceal the real status of a company’s finances, which is vital to understand as a fraud examiner. Strict adherence to accounting rules is required, and any anomalous accounting activities must be carefully examined in order to prevent such manipulations (Albrecht et al., 2018). To investors, rating agencies, and regulators, businesses must be open and honest about their assets and obligations. In this instance, Lehman’s management betrayed the stakeholders’ confidence by using such ploys. The firm’s financial statements should undergo independent audits as one method of preventing such accounting fraud. The board of directors should be informed of anomalous transactions on the auditor’s notice (Rufus, Miller & Hahn, 2015). The board of directors must investigate the best course of action.

Therefore, the Lehman Brothers situation teaches businesses to abide by accounting rules and be forthcoming with their disclosures. Auditors must be diligent in spotting any odd accounting activities and notify the board of directors (Rufus, Miller & Hahn, 2015). Such transactions shall be subject to review and action by the board of directors. Companies need to be held responsible for their activities, and those using accounting tricks must be disciplined.

References

Albrecht, W. S., Albrecht, C. O., Albrecht, C. C., & Zimbelman, M. F. (2018). Fraud examination. Cengage Learning.

De La Merced, Michael. & Sorkin, Andrew. (2010, March 11). The report details how Lehman hid its woes. The New York Times. Retrieved April 18, 2023, from https://archive.nytimes.com/www.nytimes.com/2010/03/12/business/12lehman.html

Dominey, J. W., Fleming, A. S., Kranacher, M. J., & Riley, R. (2010). Beyond the fraud triangle: enhancing deterrence of economic crime. The CPA Journal, 80(7), 17-24.

Hubbs, R. (2012). Fraud magazine. Fraud Magazine. Retrieved April 18, 2023, from https://www.fraud-magazine.com/article.aspx?id=4294972144

Lurigio, A. J. (2023). Money laundering. In Handbook on Crime and Technology (pp. 179-192). Edward Elgar Publishing.

Marquet, C. T. (2011). The top 10 embezzlement cases in modern US history. Marquet International, Boston, MA, 1-18.

Rufus, R., Miller, L., & Hahn, W. (2015). Forensic accounting. Pearson Higher Ed.

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Your individual project requires that you prepare a 5 – 7-page case analysis by selecting one of the worst accounting scandals of all time. (See list below) Before you start your research, begin by reading the articles provided and then start your analysis. You can work on a case not reflected below with prior instructor approval.

– Waste Management Scandal (1998)
– Enron Scandal (2001)
– WorldCom Scandal (2002)
– Tyco Scandal (2002)
– HealthSouth Scandal (2003)
– Freddie Mac Scandal (2003)
– American International Group (AIG) Scandal (2005)
– Lehman Brothers Scandal (2008)
– Bernie Madoff Scandal (2008)
– Satyam Scandal (2009)
– Wirecard (2020)
– Luckin Coffee (2020)
– Wells Fargo (2016)
– Volkswagen (2015)
– Theranos (2018)

Links to summaries of each scandal are reflected below; however, feel free to conduct additional research on the scandal you plan to write about.

https://www.accounting-degree.org/scandals/
https://www.wallstreetmojo.com/accounting-scandals/
https://money.usnews.com/investing/stock-market-news/slideshows/biggest-corporate-frauds-in-history
https://www.businessinsider.com/theranos-founder-ceo-elizabeth-holmes-life-story-bio-2018-4

Step One: Analyze the Company’s History

The company’s past may have greatly affected the state of the organization. To begin your case study analysis, investigate the company’s founding, red flags, critical financial incidents, structure, and growth. Create a timeline of events and issues. This timeline will come in handy for the next step in your case analysis. What is the history could have led to the company’s fall?

Step Two: Identify Weaknesses within the Company

Using the information you gathered in step one, continue your case study analysis by examining and making a list of fraudulent crimes that occurred in the company. For example, the company may have been weak in one particular area but strong in another, which led to non-detection. Make a list of problems that have occurred and note the effects they had on the company and its stakeholders.

Step Three: Gather Information on the Environment

The third step involves identifying threats within the company’s internal and external environment. What about the environment that led to fraud and later detection?

Step Four: Analyze Findings

Using the information in steps two and three, you will need to create an analysis for this portion of your case study. Compare the weaknesses within the company to exposure, threats, and opportunities for fraud that took place.

Step Five: Analyze Systems and Evidence Found

This step requires that you identify and analyze the structure and control systems that the fraudsters used to cover their tracks. Evaluate organizational change, levels of hierarchy, employees involved, conflicts, and other human factor issues deemed important. Look at the evidence in detail and discuss it.

Step Six: Forensic Recommendations and Outcomes

The final part of your case study analysis should include your recommendations as a fraud examiner. Be sure to address issues of remediation that occurred. Every recommendation you make should be based on your own knowledge and supported by outside sources.

Never make a baseless recommendation. You want to make sure that your suggested solutions are realistic. What, in this case, could have been avoided? How could the corporate accounting fraud case have been circumvented or stopped earlier? Analyze this case as if you were working it yourself.

Step Seven: Review the Case Study Analysis

Look over your analysis. Critique your work to make sure every step has been covered. Look for grammatical errors, poor sentence structure, or other items that can be improved. Appropriately cite your work using APA format.

Case Study Analysis Tips

• Know the case well before you begin the case study analysis.
• Give yourself enough time to write the case study analysis. You don’t want to rush through it.
• Be honest in your evaluations. Don’t let personal issues and opinions cloud your judgment.
• Be analytical, not purely descriptive.
• Include a minimum of three resources to support your recommendations.
• Proofread your work!