Question

What occured to cause the 2008 fraud that occured in Lehman Brothers? And, what is the importance of internal control systems to clients and auditors in regards to this fraud case? Please write in detail if possible.  

Answer 1

There are a number of reasons for the failure of Lehman Bros.

• Irresponsible lending practices

• Excessive dependence on credit ratings by investors.

• The explosion of complex financial products, together with derivatives, with lack of liquidity and other risk characteristics that were not transparent or understood.

• Vicious incentives and asymmetric return arrangements encouraged unwarranted risk-taking.

• Deficient management of risk and oversight of companies involved in marketing and purchasing complex financial products.

• Lack of monitoring in financial regulatory framework and lessening the risks across has synchronized entities and markets.

• The lack of an adequate legitimate framework for the lapse of large investment bank holding companies on a consolidated basis.

Importance of internal control systems:-

Establish Protocols-: By creating internal controls, small business owners establish protocols and procedures their staff and consultants must follow. Small business owners inform their employees of these protocols and expect that they follow them as they perform their day-to-day work duties.

Prevent Fraud and Theft-: Establishing internal controls can help companies prevent or reduce fraud and theft within their organizations. Internal controls can include activities such as reconciling bank statements and internal audit reviews, which can uncover whether the company's money is being misappropriated by management or employees.