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Lehman Brothers Fraud
Term Paper ID:45768
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Essay Subject:
lehman, brothers, fraud, ethics... More...
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2 Pages / 450 Words
3 sources, 4 Citations,
APA Format
$8.00
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Paper Introduction:
Ethics in Accounting - The Basis for the Problem Some kind of accounting takes place in every economic transaction beit barter or a monetary Most transactions are pretty innocuous as far asthe accounting implications go but the major accounting frauds and crisesof the past few decades have come at the hands of savvy financialaccountants These people\'s motivations are no doubt driven by twocombinatorial factors their organizations linkages to international stockmarkets and their own stock options The philosopher Jurgen Habermasastutely observes that that
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Ethics in Accounting - The Basis for the Problem Some kind of accounting takes place in every economic transaction, beit barter or a monetary. (Valukas, 2 1 ) Some critics point to Timothy Geithner who was, at a minimum,derelict in his duty over oversight, "and may well be culpable in aidingand abetting Lehman in accounting fraud and Sarbox violations" (NakedCapitalism, 2 1 ). Valukas's report lays out the details of thedilemma facing top Lehman executives: "In order to reduce its net leverage, Lehman could have eitherdecreased the numerator used in its net leverage ratio calculation (i.e., netassets), or increased the denominator by raising equity.3177 Fuldacknowledged that although raising equitycould also reduce thenet leverage ratio, Lehman had to improve its net leverage byreducing its net assets (i.e., selling inventory) because "there wasa perception issue" with raising equity.3178 "If we raised equity, wewould have brought the [net leverage ratio] number down, but wouldnot have really fixed anything."3179 Accordingly, to meet its goal ofreducing the firm-wide net leverage ratio, Lehman sought to reduce itsnet assets.318 Reducing net assets through outright sales, however, alsocame at a cost to Lehman. (2 1 ). .Reducing leverage is necessary to removerefinancing risk and win back the confidence of the market, lenders, and investors."3182 As Secretary TimothyGeithner explained to the Examiner, selling "sticky" assets at discountscould hurt Lehman by revealing to the market that Lehman "had a lot of air in [its] marks" and thereby further draining confidence inthe valuation of the assets that remained on Lehman's balance sheet. . In the following months it became clear thatit was common knowledge among insiders that Lehman's books were suspect asfinally shown conclusively in Anton Valukas 2 1 report (Valukas, 2 1 ).In Henry Paulson's 2 1 book On the Brink: Inside the Race to Stop theCollapse of the Global Financial System the author similarly states thatinsiders were aware of Lehman's "sticky" assets that it worked todeleverage throughout 2 7 and 2 8 and acted like the phony assets were nobig deal (Paulson, 2 1 ). These people's motivations are no doubt driven by twocombinatorial factors: their organizations linkages to international stockmarkets and their own stock options. New York: Grand Central Publishing.Valukas, A. Valukas, Examiner. United States Bankruptcy Court Southern District of NewYork Report. Thespecific mechanisms of accounting fraud in the Lehman case are also madeclear: either raise the numerator in the net leverage ratio or raise thedenominator by increasing equity. The first example involves an officer of company A being an officerof another company B, and having company B manage the bankruptcy of companyA. An internal Lehman PowerPointpresentation that CFO Erin Callan prepared in early April 2 8,entitled "Leverage Analysis," illustrates this point.3181 "Lehman'sgrowth in net balance sheet has been weighted toward mortgages and loans.Deleveraging will require selling these assets, which will result inlosses for Lehman. Ultimately, falsely raising thenumerator (net assets) was seen as the more favorable because of thenegative perception in the markets of raising total equity.ReferencesNaked Capitlism. (2 1 ). In Re: Lehman Brothers Holdings INC., et al. As evidenced by the passage above from the Lehmanbankruptcy proceedings, the market's perception of Lehman was the mostcentral concern of the officers involved in Lehman's managements. During the fall of Lehman Brothers, the company Alvarez Marsal handledthe bankruptcy even as Marsal was the president of the dead company Lehman. (2 1 ). Retrieved March 21, 2 1 fromlehmanreport.jenner.com/VOLUME_3.pdf What needs to be asked is: if all accountantscommitting accounting fraud went to similar BBA or MBA programs, hadsimilar corporate ethics course-hour requirements, and passed the CPA exam,why is there such a massive disconnect in minds of officers of largecorporations on the topic of the linkage of capital to real human beings'lives? The purpose of this essay is to lay out, in a few short examples,how unethical accounting practices are permitted to happen. Personal gain in undoubtedly a motivation for committingaccounting fraud, but so are institutional loyalty, the pressure to postincreasing earnings, and the fact that corporate officers often get awaywith accounting fraud. Report of AntonR. Retrieved March 21, 2 1 from http://www.nakedcapitalism.com/2 1 / 3/ny-fed-under-geithner-implicated-in-lehman-accounting-fraud.html.Paulson, H. "NY Fed Under Geithner Implicated in LehmanAccounting Fraud Allegation." Naked Capitalism. rumors,scientific studies, endorsements, ratings from rating agencies) into themarketplace. . On the Brink: Inside the Race to Stop the Collapse ofthe Global Financial System. The philosopher Jurgen Habermasastutely observes that that we now live in an age when finance oligarchsare the ones who really call the shots as they conduct minute-by-minutereferendums on financial systems by buying or selling stocks, commodities,credit-default swaps, or or simply releasing some "news" (e.g. First, the sale of many of its inventory positions wouldresult in substantial losses to Lehman. Representatives from Alvarez Marsal went on cable news to talk about thediscovery of a $13 billion hole in Lehman's balance sheet, blaming it onthe "disorderly bankruptcy". Most transactions are pretty innocuous as far asthe accounting implications go, but the major accounting frauds and crisesof the past few decades have come at the hands of savvy financialaccountants.
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