Financial crisis have been in reports since the last decade and has created issues for a number of companies that have gone bankrupt or in other cases even liquidated. Such examples include Enron and Lehman brothers. The fact remains the same that all business activities at one point of their business life cycle are connected with fraud or unfair means of business practices and are always affected by the financial collapses, be it the failure of the business due to less capital or the takeover due to financial problems. Among these accounting scandals the most major ones that led to the failure of the business include Lehman Brothers and Enron which have cost billions of dollars to the stakeholders along with damaging the reputation of accounting profession.
Enrons known to be the largest bankruptcy case in the history of the US companies. Initially Enron's stock prices rose to $83.3 in 2001 with the market capitalization exceeding to $60 billion. Stock prices are usually a means to know the performance of the business and what the rise in prices of the stock showed for Enron was that it was doing pretty good in its field it also gave its stakeholders an idea that the prices could actually show the increase in the profits but what the stakeholders didn't realize was that the earning basically was due to the fraudulent accounting practices. The use of accounting in the fraudulent way let the investors lose their trust in any further investment as stated by Calkins, (2004), "Enron Fraud Trial: Ends in Five Convictions".
Calkins (2004) stated that the simplest of explanation for Enron's case was that assets and profits were inflated and were nonexistent. Most of the debts were put into the entities formed somewhere else hence they were not included in the firm's financial statements of any year .Even the losses of Enron were put into the businesses formed outside of US but they were not included in the financial statements. Not only this but any other transactions that took place between Enron and related companies were used to take unprofitable businesses of the company's financial books therefore the profit and losses of the firm were inaccurately put into the books intentionally. Furthermore Enron was successful in fooling its stakeholders and the society. The image was presented such that nobody knew what was going inside the company but later it failed to keep that image hidden as the account books were put forward with the shareholders.
In the case of the Enron the company appears to have followed the GAAP rules technically which means that this created numerous complex capital transactions. According to Times CNN (2002), "Enron: who's accountable?" it seems that the only purpose of adding these "Byzantine Transactions" was to keep billions of dollars of debts off the balance sheet and also hiding many of liabilities from the view of creditors and investors. On the other hand principles based accounting follow few exact rules and general principles are put forward as companies must ensure that their financial statements fairly represent the principles
Lehman Brothers' Case
Another case that took over the news was the famous Lehman Brothers case.BBC news (2002) reports suggested that it was like another Enron case, but what exactly led to the failure of the Lehman Brothers? To shed a light on the case, firstly Lehman brothers filed bankruptcy as mentioned in House, (2010) "Lehman Brothers' Bankruptcy, The greatest hit." Many argue that it led to the financial crisis or in other words is facing "great recession". The real reasons for the Lehman Brothers to file bankruptcy as stated by Henning (2010) in the article "In Lehman's Demise, Some Shades of Enron" were the failures in corporate governance and auditing the financial controls. Lehman brothers again and again exceeded their own internal risk limits and controls. Not only this but a few risks that the management took when deciding on the strategies relating to the financial department also led to its collapse. There were actionable balance sheet manipulations that broke the trust of the investors where the financial issues were concerned. What actually led to the failure was the accounting device for which Valukas, a partner in the New York office of the venerable law firm "Jenner & Block", was inquired in January 2009 by the U.S. Bankruptcy Court for the Southern District of New York in order to answer few questions related to this case. Sharp(2010) in his article "Lehman Brother's: Repo 105" wrote that Valukas disclosed that Lehman Brothers used ,Repo 105, which is basically a tool to alter balance sheets. By using that, the company shifted its huge amount, approximately $50 billion of toxic assets off its financial statements during its first and second quarters of the financial year 2008. They should have reported these toxic assets as losses or should have sold them but they decided to write it off their balance sheet.
Later the US security and exchange commission after investigating the former Lehman chief executive mentioned that though the values of their securities in each transaction were 105 percent of the cash it received, Lehman brothers were supposed to treat Repo 105 transactions as sales but they treated them as finances which led to the failure of the company.
Valukas further explained that Lehman brothers failed to disclose the tool 'Repo 105' to the government regulators, rating agencies, investors or to the Lehman Board of Directors. It was clear from the acts that Lehman Brothers were working along with the big auditing firm known as Ernst and Young. Financial daily International in "Ernst and Young accused of hiding Lehman troubles," explained that instead of stopping the company from using unfair means Ernst and Young was part of the scheme. Lehman audited books showed that the company was highly leveraged entity. Lehman Brothers with the help of Ernst and young led its investors to believe that the company was doing fine until the accounting frauds were put forward with the board of directors and also on the Wall Street.
As stated by Morris (2010) in 'Lehman as' Enron: The Sequel', Enron and Lehman brother scandals are the few of the major cases that has changed the world's financial situation. The great recession that the world facing today is due to the Lehman Brother/ Ernst and Young case and how their accounting frauds led to a fall of a major company. Lehman brother case is believed to be the Enron case of its time. These cases should be looked at very closely in order to root out the major financial and accounting irregularities, so that the world could avoid facing such recessions again. Although such scandals have hit the investors hard on the face and had earned them a number of losses, they still believe that they would be given fair compensation and that the US court would help them reclaim their lost money by filing suits on the companies and then by fairly putting these companies into mediation.
