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In 2008, the fall of the fourth largest investment bank in US Lehman Brother (LB) has brought on a
Domino effect to the global financial market and giant companies began to feel the ripple one by one.
Sadly, the collapse of this company is the result of preventable human errors and in particular, failure to
obey ethics. In the following paragraphs, we are going to examine the causes, effects and solutions of
LBs bankruptcy from an ethics perspective.
LB put excessive emphasis on short-term revenues over long-term stability and had established a reward
culture that encouraged excessive risk taking. Individual employees, acting out of egoism, therefore
sought to benefit from risk-taking behaviour and failed to balance risk and returns for investors. On the
other hand, culture of questioning and overruling risky decision was suppressed and individuals were
unwilling or unable to voice out opinions towards unethical behaviour. Openness was discouraged and
unethical practices went on unknowingly until they caused a big liquidity problem. Even though
individuals might be ethical employees, they were forced to follow the conventional rules at LB and
behave unethically in such a business environment.
Former CEO and 12 other executives and directors of LB claimed to be ignorant of use of accounting
manipulation (Brien, 2010). Top management made unethical and irresponsible business judgement and
failed to monitor the organization, allowing misleading/fraudulent reports to be published. Managers
hoped to get away with undesirable assets using accounting and not to deal with the root problem
(Durden, 2010). The public was misled about the companys financial status and profitability and
continued to invest (Francis, 2008).
Accounting techniques were utilized to manipulate balance sheets to portray a more favourable financial
impression for existing and potential investors. For example, just before the collapse, LB allowed $55
million CCC-rated to be included in a Repo 105 transaction (Durden, 2010). Auditors were silent about
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what was going on as well. Such unfair practices might have lead competitors to imitate and form an
unfavourable industry culture. Society welfare was greatly compromised when one company collapse
and brought forward the Domino effect.
Since people all know about unethical behaviour and its potential consequences, why do they continue
to do so?
The first thing we have to know is that no law is perfect and free of error. Businessmen, lawyers and
other professionals, under profit-driven environment, seek to find opportunities to make profits and
outperform others. For example, lenders began to consider high-risk borrowers and offer riskier loan
options and this eventually evolved into the subprime crisis (University of North Caroline, 2012).
Mistakes and holes can be continuously spotted from laws and regulations and be made use of. Other
than business practices, another example would be the manipulation of accounts. While creative
accounting causes negligible harm most of the times as companies are able to recover from small crisis
and perform well on the whole (Raubenheimer, 2008), excessive use of these methods twisted
companies real financial status too much and caused significant losses to investors (McGregor). One
way to mitigate potential losses is to involve auditors in the process and to hold auditors and top
management responsible for excessive window dressing of accounts. In the case of LB, if Ernst &
Young had reported the use of Repo 105, losses might have been controlled (Times of Malta, 2012).
Society places a high value on economic success and associates economic power with higher social
status and political power. In the banking and finance industry, money is the key to everything. This
creates intense competition among people, departments or companies (Sims). Such organizational
culture undermines the fear for potential exposure and punishment and changes individual behaviour.
When a group of results-driven people work together and seek to undermine one another, vicious
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competition occurs and people act on the boundary of laws as long as they seem to obey their fiduciary
duties (Brien, 2010). For instance, relationship managers used exaggerated sales pitches and hide
important information to attract retirees into buying Lehman Minibonds to meet sales target and caused
many Singapore investors to lose millions of life savings (Francis, 2008).
What mentioned above should not be used as excuses for companies to continue carry on unethical
practices. Humans should learn from LBs mistakes and build stricter ethics rules for companies,
organizations and governments.
A written code of ethics should be established at LB and shareholders should vote for top executives
who can act as ethical role models. This ethics code should prevent actions involving excessive risks
and encourage employees to make decision responsible for investors. This can be made in line with a
compliance-based ethics programme. Rules and punishment regulations should be set up to prevent
unethical conducts. A mechanism of internal whistle-blowing could have been enacted to bring notions
of unethical conducts to the attention of higher levels and other interested parties. Employees are
required to report unethical behaviour of colleagues. A balance is needed in the company between
pursuit for financial benefits and ethics and between intense competition and friendly rivalry.
External board directors should step in to judge behaviour of managers. Managers roles should be
adjusted or even rotated more frequently so that no one is able to hold full control of one position for too
long as people tend to misbehave under no fear of being replaced. Rotation prevents over-confidence
and corruption found on many self-perpetuating boards and brings in new ideas and blood into
companies (Martinelli, 2013). This is necessary as LBs fall is largely due to top executives wrong
judgement and irresponsibility.
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Transparency is also essential in the finance industry. While businesses are allowed to keep their
business secrets, new accounting rules should require disclosure of accounting methods in order for the
public to form own judgements.
Human resource management is a key regulator and controller of a companys ethics. Not only should
companies recruit people with high moral standards but also should group them in ways that allow
employees to compete friendly and ethically. Ethics assessment should be conducted regularly to make
sure that employees and managers are capable of making rational and moral decisions.
All in all, what happened stays in the past. People should learn from the past and move forward to the
future. We, as students and future business men and women, have the responsibility to maintain high
moral standards and uphold ethics for the better good of the society.


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Bibliography
Brien, G. O. (18 March, 2010). Lehman Brothers Perfect Storm: Where Ethical Lapses Met Bad Judgment.
Retrieved February, 2013, from The Week in Ethics:
http://theweekinethics.wordpress.com/2010/03/18/lehman-brothers%E2%80%99-perfect-storm-
where-ethical-lapses-met-bad-judgment/
Durden, T. (13 November, 2010). The "Repo 105" Scam: How Lehman Fooled Everyone (Including Allegedly Dick
Fuld) And How Other Banks Are Likely Doing This Right Now. Retrieved February, 2013, from Zero Hedge:
http://www.zerohedge.com/article/repo-105-scam-how-lehman-fooled-everyone-including-allegedly-
dick-fuld-and-how-other-banks-a
Francis, C. (16 October, 2008). $100,000 Life Savings Gone. The Straits Times.
Martinelli, F. (2013). Building an Effective Board of Directors. Retrieved February, 2013, from Create the Future:
http://www.createthefuture.com/Board%20of%20Directors.htm
McGregor, S. (n.d.). Earnings Management and Manipulation. Retrieved 17 February, 2013, from
http://webpage.pace.edu/pviswanath/notes/corpfin/earningsmanip.html
Raubenheimer, E. J. (May, 2008). Effects Of Estimates In Financial Statements.
Sims, R. R. (n.d.). Ethics and Corporate Social Responsiblity: Why Giants Fall.
Times of Malta. (8 December, 2012). Auditor's report shows GonziPN's lack of credibility - PL. Retrieved 17
February, 2013, from Times of Malta.com:
http://www.timesofmalta.com/articles/view/20121208/local/auditor-s-report-shows-gonzipn-s-lack-of-
credibility-pl.448692
University of North Caroline. (2012). Subprime mortgage crisis. Retrieved 2013, from
http://www.stat.unc.edu/faculty/cji/fys/2012/Subprime%20mortgage%20crisis.pdf

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