LEHMAN BROTHERS BANKRUPTCY In Partial Fulfillment of Final Requirement in Governance, Business Ethics, Risk Management, and Internal Control College of Accounting Education Submitted by: Alico, Maria Rose Balansag, Emarey Guro, Alyssah Mae Linsag, Alyssa Marie Pinili, Shane Mae May 2022 Introduction Lehman Brothers Holdings Inc. was a global financial services firm founded in 1847. Lehman was the fourth-largest investment bank in Unites States. Six million Germans immigrated to the United States during the nineteenth century because of political turmoil and bad economic conditions in their nation including in that immigrant is the 23-year-old German, Henry Lehman who arrived in Montgomery, Alabama and over the next few years Emanuel Lehman and Mayer Lehman joined him in Montgomery. The three brothers opened a small retail store that sold groceries, apparel, and hardware. Majority of the Lehman brothers’ customers were cotton farmers from nearby rural areas. The farmers used cotton bales as their payment to their merchandise purchase. The brothers quickly recognized that purchasing and selling cotton yielded higher earnings than running a retail store, so they became cotton merchants. In 1858, the Lehman brothers decided to open an office in lower Manhattan, just a few streets from the Wall Street financial district because of the tremendous need for cotton in New England's growing textiles industry. During 1860, they ruled in the South as King Cotton. But the outbreak of the Civil War in 1861 forced the Lehman’s, who supported the Confederacy, to close that office. Throughout the Civil War the Lehman brothers lost their biggest market but they realized that after the war the demand for the cotton will increase so they bought large quantities of cotton and stored it in a well-hidden warehouse that scattered along the South. Following the war, the brothers' postwar gains from selling that cotton enabled them to reestablish their firm as one of the leading cotton merchants in the South. The Lehman brothers reopened their New York City office in 1870, and a few years later, they made it their corporate headquarters. The Lehman brothers gradually expanded their business to encompass the trading of other commodities such as coffee, sugar, wheat, and petroleum products in the latter decades of the nineteenth century. A seat on the New York Stock Exchange was also purchased by the three brothers. The three brothers also decided to purchase a New York Stock Exchange seat. They realized that there was a need for financial intermediaries to funnel private investment capital to the large companies that were fueling the nation’s rapid economic growth. The three brothers were well-versed in the banking and credit industries due to the nature of their firm, and they believed they could simply transition into the expanding and lucrative investment banking industry by leveraging their experience. Throughout its history, Lehman Brothers experienced the highs and lows of the volatile business cycle common to the investment banking industry. The intensity of that cycle was magnified by a new line of investment products that Lehman and its competitors made popular on Wall Street during the 1990s. Facts & Unethical Issues (TENTATIVE) The release of the bankruptcy report prompted a public outcry because it revealed that Lehman’s executives had routinely used multibillion-dollar “accounting-motivated” transactions to embellish their company’s financial data. As the company’s financial health was rapidly deteriorating in 2007 and 2008, Lehman’s executives had ramped up their use of the controversial transactions, resulting in the company’s liabilities being understated by as much as $50 billion. Moreover, Lehman’s never disclosed or referred to those transactions in the 10-K and 10-Q registration statements it filed periodically with the Securities and Exchange Commission (SEC). Lehman’s audit firm had been aware of the billion-dollar transactions the company had used to window-dress its financial statements. The bankruptcy examiner also maintained that the audit firm had not properly informed Lehman’s management and audit committee of an internal whistleblower’s allegations that management was intentionally misrepresenting the company’s financial statements.
