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

Lehman's collapse roiled global financial markets for weeks, given the size of the company and its status as a major player in the U.S. and internationally. Many questioned the U.S. government's decision to let Lehman fail, compared with its tacit support for Bear Stearns, which was acquired by JPMorgan Chase & Co. (JPM) in March 2008. Lehman's bankruptcy led to more than $46 billion of its market value being wiped out. Its collapse also served as the catalyst for the purchase of Merrill Lynch by Bank of America in an emergency deal that was also announced on Sept. 15.

The downfall of Lehman evidently shows the relationship between regulations and action management arrangement [12]. The letdown uncovered the deficit in the regulatory system, thereby calling for the urgent need for severe supervision of specific performance indicators such as a firm’s liquidity situation, solvency and success [12].

Policy makers such as the International Financial Reporting Standards (IFRS), Securities and Exchange Commission (SEC), the Basel Accord et al, must commence tough policies to address the Lehman failure to prevent some future episode [12]. The good news is that banks today are much better capitalized than they were five years ago, in line with the new international regulatory principles [8]. Firms are required to fuse with high-quality corporate governance practice to restore investors’ confidence via ethical practices and standards [12]. Basel III requires banks to hold more capital to raise the bank’s capacity to absorb losses and makes them more flexible against sudden shocks [8]. In this regard, Basel III hangs on to the concept of risk-weighted assets for sensible risk management [8].

There exists a hesitation whether the zero risk weight for government bonds is sufficient [8]. For the first time ever, an international standard on liquidity has been decided on, that can shield banks to a certain degree from liquidity constrict in the money market [8]. If a too-big-tofail bank runs into trouble, the government enters to prevent a systemic crisis [8]. We have to ensure that large and interconnected banks can fail without causing a systemic crisis [8]. A new international principle on recovery and resolution of systemically important banks has been developed, which is a major step forward [8]. However, the willingness to let an institution go bankrupt is a political rather than an economic decision [8].

The IT and tech spending by the big banks has fallen since 2007. Big Data and increasingly urbane analytics offer huge opportunities to better understand and serve worldwide markets [13]. These could offer regulators with efficient tools, enabling them to detect potential danger and intervene in time to prevent another crisis [13].

By promising liberty, easing long-term planning, and closing the resource crack between the agency and the entities it controls, selfgoverning funding will permit the SEC to protect millions of investors, by identifying and addressing all types of risks [2]. Tough actions will be taken to prevent future risky activities under its supervision and new responsibilities assigned to it under any future legislation [2].

The FDIC’s report states that if Dodd-Frank was in place; Lehman would not have gone bankrupt, as it would have received help from the government to settle its debt [14]. On the other hand, this report was based on numerous suppositions and only time can tell if regulations are beyond doubt efficient since testing has not been done [14,15].