Lessons from Lehman Brothers: Will We Ever Learn? MGT 521 September 9, 2013

Introduction
Lehman Brothers financial services filed bankruptcy on September 15, 2008, in the New York Southern District U.S. Bankruptcy Court. Resulting in an immediate 500 point drop in the Dow Jones (Did Ernst & Young Really Assist Financial Fraud? 2011). This day became known as ‘‘Dark Monday’’ (Donaldson, 2012). This was to date, the largest bankruptcy filing in history unleashing a “crisis of confidence that threw financial markets worldwide into turmoil, sparking the worst crisis since the Great Depression.” However this financial icon’s fall is no surprise. The bankruptcy examiner released reports saying that the firm’s executives and auditor, “lambasted” for what they did to cause the collapse of the firm (Robbins & Coulter, 2010).
The Lehman Brother culture was one of risk and reward. At the company, “Excessive risk taking by employees was openly lauded and rewarded handsomely. Employees knew they could give risky ideas and they would get rewards for them. Individuals making questionable deals were hailed and treated as ‘conquering heroes’.” (Robbins & Coulter, 2010, pp. 147-148). If anyone would question decisions made or speak out in disagreement, executives would not listen. In addition, the executives would overrule and go with the least desirable decision. Most companies would be wary of taking so many risks and only give reward after that risk had proven to be a good decision. For the Lehman Brothers if the risk turned out to be bad and the company was actually at a lost, they would conceal it. Lehman was once known for its “Family” like culture. So what happened? According to Greenfield (2009), "the mistake lay in putting too much faith in an outmoded culture and failing to see how its very strength undermined the business”. Additionally, the culture was afraid of change and diversity. This also led to the company’s downfall. “A culture that is too strong can also end up too rigid and can shut out diversity. It can cause people not to trust others who are unlike them or haven’t shared their experiences – confusing the unfamiliar with incorrect” (Greenfield, 2009, pp 65). Due to bad decision making with some favorable results, they assumed they can continue to operate the same way without any repercussion. When the outcome was unfavorable, they began to conceal their losses, which began of the collapse of Lehman Brothers
The collapse of Lehman Brothers is blamed on the executives who allowed misleading and fraudulent manipulation of financial transactions and documents. Bankruptcy court appointed examiner Anton Valukas stated in a report, “The Lehman executives and the firm’s auditor, Ernst & Young, were profoundly criticized for actions that led to the firm’s collapse.” Valukas explained that Lehman “repeatedly exceeded its own internal risk limits and controls, and a wide range of bad calls by its management led to the bank’s failure.” Valukas report stated that Lehman’s executives “should have done more, done better.” Valukas pointed out Lehman’s former Chief Executive Richard Fuld forced the company to file misleading periodic reports. Lehman used an accounting device they called “Repo 105” to get rid of about $50 billion dollars’ worth of undesirable assets off their balance sheet. The Repo 105 transactions only purpose was to manipulate the balance sheet; these transactions had no true substance. Fuld knew about the use and purpose of Repo 105 transactions; however he knowingly signed off on quarterly reports that did not mention such transactions (Robbins & Coulter, 2010). Furthermore Lehman’s auditor Ernst & Young was aware of the use of Repo 105, but did not make any efforts to resolve the issue or question the motives. Instead, the auditor approved the use of Repo 105 transactions that created a misleading picture of Lehman's financial position (Did Ernst & Young Really Assist Financial Fraud?, 2011).
Although The Sarbanes-Oxley Act was regulated to more stringent changes of financial practice and corporate governance, these types of unethical situations continue to exist due to greed and temptation. There are executives and top managers who seek the easy way to make the most money for them, without consideration for their shareholders who should be the priority. There will be no end to people with varying motivations trying to gain an unfair or even illegal advantage to get more of it. It’s not unreasonable to expect companies to act ethically: this is one reason so many laws and regulations are implemented. However, it is just difficult to find a company with a large number of personnel to conduct themselves ethically.

Conclusion
The Lehman Brothers case is another unfortunate financial crisis. Their company affected many shareholders and financial institutions around the world. The leadership of Lehman Brothers failed to uphold their mission statement and the financial rewards for themselves undermine their decision-making processes. Self-interest led them to make decisions that were extremely risky than their own internal controls were designed to control, and top executives received high compensations for taking such risks. It appeared that other personnel with various intentions also made irresponsible decisions without regard to those who would be adversely affected. Their company culture turned into “getting the biggest bang for your buck,” no matter what the potential cost of failure may be. Ethics were not a concern to Lehman executives, as they did everything that was bad for the business, and tried very hard to cover it up until the very end. Of course, emphasizing on ethics and decision making tactics would have helped tremendously.

References
Did Ernst & Young Really Assist Financial Fraud? (2011). Strategic Finance, 92(9), 14-17. Retrieved from http://search.proquest.com/docview/857240730?accountid=458
Donaldson, T. (2012). Three ethical roots of the economic crisis. Journal of Business Ethics, 106(1), 5-8. doi:http://dx.doi.org/10.1007/s10551-011-1054-z
Greenfield, H. (2009, Fall). Culture Clash. The Conference Board Review, pp 60-65
Robbins, Coulter, S. (2010). Management (11th ed). Pearson Learning Solutions. Retrieved from http://online.vitalsource.com/books/9781269357937/id/pg147