#fb #Lehman failure: Scandal of Enron proportions!

My financial accounting standards and SEC whiz of a partner does a great writeup of the bankruptcy examiner's findings on the Lehman Bros. failure which started this whole global financial crisis.

The net net.  The scandal at Lehman was, in my opinion, just as horrifying as those at Enron and WorldCom.  Yet where is the media outcry now?

In case you don't want to plow through the detail, I'll try to quickly summarize:

Lehman gamed their balance sheet before the end of each quarter to make the company look less leveraged (more leverage bad; less leverage good from a company health perspective) so the ratings agencies and investors would think the company was in much better shape than it really was.  The way they accomplished this is a clear study in business ethics.  Through a loophole in accounting standards and a questionable use of another country's legal system, Lehman was able to "sell" its easiest to sell assets and receive cash from the "sales" to reduce it's leverage ratios.  The problem was, they weren't really selling the assets.  They were transferring them to someone temporarily for cash with the full intent that they would be transferred back in a short period of time and the cash repaid.  This is done in the business world all the time to cover short-term cash-flow issues.  Now most of us who are not ethically challenged would look at that transaction and say that it seemed very much like a short-term loan which is handled very differently on the balance sheet and does not decrease leverage.  But not investment banking executives who are intent on making sure they make their multi-million dollar bonuses.  These Lehman executives accounted for (and their auditors Ernst & Young, approved of) this transaction as a true sale of the assets and the cash received as if it would never have to be paid back even though after the quarterly conference call the assets would be transferred back and the cash repaid.  To add insult to injury, the assets that they were "selling" were believed to be vaunted subprime mortgages, which gave investors a false sense of relief that Lehman was getting rid of the bad - when in fact is was just round-tripping the good and keeping the bad (why? because no one would buy them).  The executives repeatedly lied (simply stretched the truth I am sure they were thinking) to investors and analysts each quarter as they manipulated their balance sheet.  Internal emails find executives talking about the transactions as a "drug" that they need to get off of.

It is the same story over and over again, isn't it?  First, there is no lack of greed at the executive level when big $ are involved.  And second, there is still something seriously wrong with the accounting firm/company relationship.  As investors, the only thing we can truly rely upon is that the financial statements will accurately reflect the state of the business.  We rely upon the company's auditors to be independent 3rd parties to make sure that is the case.  The challenge that exists is that accounting firms are profit-based businesses which make lots of money from their clients, some of which have been with them for many, many decades.  What accounting firm wants to risk losing that business by pointing out wrongdoings.  Most, we hope would.  But the Lehman examiner found Ernst turned a blind eye.  It may bring down Earnst just like Enron brought down Andersen.  Unfortunately, the threat of ruin doesn't seem to be enough consequence for the accounting firms.  Funny that.  I am afraid to say the only alternative may be (I know, I know) a government run agency instead.  I am not thrilled with it (just look at how badly the SEC and Fed handled the run-up to the mortgage crisis), but it seems like you have to take the profit motive out of the accounting firms to remove that incentive to ignore problems.

Where's the media?  Where's the outrage?