The functioning of any company that operates on the international level and has huge incomes is always related to various risks. There is a great possibility of financial collapse and bankruptcy as the conditions of the modern market could be considered complicated. It is obvious, that the failure of a great international corporation could not but impact wide sections of the population and numerous companies whose functioning depends on its success.
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However, a case is more complex when there is a possibility of a fraud that might pursue various aims. Under these conditions, depositors and other actors who depend on the revenues of a company that is going to cheat or use some inappropriate strategies that could help owners of a company to obtain huge and undocumented incomes might suffer. That is why it is crucial to analyze a case of this sort to understand the main model according to which a company might act.
Lehman Brothers Fraud could be considered a case of this sort. Being an influential and powerful international company, it had a great impact on the well-being of various people. For this reason, its collapse was considered an outstanding event in the business world. On September 18, 2008, Lehman Brothers filed for bankruptcy. (“Case Study: The Collapse of Lehman Brothers” par. 1). Its debt was about $619 billion and conditioned the appearance of a great public response (“Case Study: The Collapse of Lehman Brothers” par. 1).
The case was taken as the largest bankruptcy in history as it was the fourth-largest US investment bank with about 25000 employees all over the world (“Case Study: The Collapse of Lehman Brothers” par. 3). A great scope of the problem predetermined great attention given to it and conditioned the appearance of numerous papers that tend to investigate the case and obtain a clear understanding of the patterns used by the company when passing through the insolvency proceeding.
The company was founded by German immigrant Henry Lehman in Montgomery, Alabama in 1844. Later, in 1850 it transformed into Lehman Brothers. It managed to face several challenges that appeared in the course of its evolution and became a powerful international corporation that had an opportunity to impact the US economy greatly. However, the 2008 financial crisis and the collapse of the US housing market conditioned the significant worsening of the companys well-being and predetermined its collapse. During the 2003 and 2004 housing boom, the company managed to acquire five mortgage lenders that were taken as the guarantee of its beneficial evolution (Moody par. 9).
However, the apparent cracks in the US housing market resulted in the crucial alteration of the situation and the appearance of numerous problems with investors, depositors, and stakeholders. It could be considered the beginning of the companys bankruptcy as conditions for its further collapse were created.
In 2008 Lehman Brothers faced a significant financial loss because of the further development of the 2008 financial crisis and due to the continuing subprime mortgage crisis (Moody par. 4). The company reported a negative profit of $2,8 billion and decided to raise $6 billion in additional capital (Merced and Andrew par. 6). However, the given measure was not enough and the company was going to accept a set of severe measures to guarantee that it will be able to survive and overcome these obstacles. Unfortunately, there were no signs of improvement and Lehman Brothers was not able to continue its functioning by its current strategy. For this reason, the company had to decide to file for bankruptcy. However, several important factors should be considered while investigating the given case.
However, trying to save the company and avoid even greater losses, Lehman Brothers used a scheme that might help it to improve the situation. The organization recognized a loophole in the accounting standard language (Coenen par. 4) and tried to use it. Thus, “liabilities were not recorded for these asset transactions, but rather assets were taken off its balance sheet and the cash received was then used to repay other debt, effectively lowering its leverage” (Moody par. 3).
It could not but impact the companys showings and support its image by underlining its false prosperity. The company also used a short-term borrowing of cash agreeing to repay it however at a specific point in time (Moody par. 3). The given scheme could be classified as a fraud because it explores the imperfectness of laws that regulate accounting and loopholes that provided an opportunity to cheat.
In other words, the Lehman Brothers used an accounting maneuver known as Repo 105. It is explored when a short-term repurchase agreement is considered as a sale (Coenen par. 9). The cash obtained due to this sort of sale is used to pay down debt (Coenen par. 4).
It could help any company to continue its existence by temporarily paying down liabilities. The exploration of this very maneuver provides an organization with an opportunity to obtain extra time needed to reflect on the balance sheet. As for the Lehman brothers, it used Repo 105 three times (“Case Study: The Collapse of Lehman Brothers” par. 5). After the given fact was discovered, a great number of various companies initiated the accounting procedure to avoid the danger of using the given maneuver. Moreover, it also initiated numerous fraud charges which stated that the company Lehman Brothers assisted a massive accounting fraud (“The collapse of Lehman Brothers” par. 6) which could be considered an illegal action that should be punished.
Nevertheless, this very fraud could be considered a significant event in the world of business as it created the ground for vigorous discussions related to the usage of loopholes in accounting to guarantee the companys survival and help it to overcome the financial crisis. The greater part of actors involved in the given process tends to consider this fraud one of the main reasons for the companys collapse and deterioration of its image. Therefore, further Lehmans brothers evolution was hardly possible and the given maneuver was the only possible way to obtain at least some incomes and gain time to create the efficient strategy.
Altogether, the Lehman Brothers fraud case could be considered a good background for numerous debates and cogitations related to the great companys bankruptcy and its actions aimed at the acquisition of some revenues. Being a great US company, Lehman Brothers was characterized by $639bilion in assets and $619 billion in debt (Coenen par. 3). The given fact could not but impact its functioning and create conditions for the companys collapse.
However, Repo 105 was used by its officials to take an advantage of the existing loopholes and obtain incomes enough to gain a certain amount of time. Hence, the given approach could hardly be considered an appropriate measure as it results in the appearance of numerous fraud charges to avoid the further usage of this very practice and guarantee that other companies will not use it while trying to obtain some income.
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Case Study: The Collapse of Lehman Brothers. n.d. Web.
Coenen, Tracy. Fraud Files: Is Ernst & Young to Blame in Lehman Bros. Fraud?. 2010. Web.
Gandel, Stephen. Did Lehman Commit Accounting Fraud?. 2010. Web.
Merced, Michael, and Andrew Sorkin. “Report Details How Lehman Hid Its Woes.” New York Times. 2010. Web.
Moody, Mandy. Lehman Brothers: Accounting Left to Interpretation. 2013. Web.
“The collapse of Lehman Brothers”. The Times. n.d. Web.