Stakeholders are individuals or groups who have a vested interest in the success

Question

Stakeholders are individuals or groups who have a vested interest in the success of a company. In order to properly service its stakeholders, companies have a responsibility to keep the stakeholders informed, provide transparency, and protect the financial well-being of the organization. Select a company, other than Enron, that is of interest to you that failed to uphold its responsibility to stakeholders. Consider the responsibility to stakeholders when it comes to financial reporting as well as social responsibility.

With these thoughts in mind:

Give an example of a company that failed to uphold its responsibility to stakeholders and explain how. Explain the implications of this failure on stakeholders.

Readings:

http://www.ifac.org/system/files/downloads/5.2-IFAC-Interview-Euleen-Goh-Bringing-Financial-Reporting-Stakeholders-Together-FINAL.pdf

https://class.waldenu.edu/bbcswebdav/institution/USW1/201660_02/MS_ACCT/ACCT_6620_ACMG_6620/Week%202/Resources/Colemen(2011).pdf

Explanation / Answer

An example of a company that failed to uphold its responsibility to stakeholders and explain how

The collapse of Lehman Brothers seen by a lot of people, a corporate governance failure, not a failure of financial markets, in September 2008, was the biggest bankruptcy in the corporative history of the USA, and the event that conduced to the largest and worst financial crises of the last decades. It become true as a consequence of a fatal errors like combination of intricate accounting rules, complex derivatives, greed, excessive leverage and the complacency of rating agencies. Although it happened at a distance of seven years, it can be discovered amazing similarities between Enron and Lehman, the misbehaviour of top management. Lehman’s equivalent of the Enron’s pre-pay transactions is the Repo 105, a fascinating term that is going to become the new example of how to fool analysts and investors. Originally, repos serve a very desirable objective of making money (they would be otherwise inactive) by circulating, lending and investing it. Repo 105 transactions doubled between late 2006 and May 2008, were known inside the company, exceeded the firm’s self-imposed limits and typically happened at the end of each quarter, when financial information had to be released.

Through these transactions, Lehman Brothers managed to reduce leverage on the right-hand side of the balance sheet and, at the same time, reduce assets on the left-hand side. They used repos reportedly for financing reasons, but accounted for them as asset disposals. These Repo proceeds amounted to about $50 billion by September 2008 – which is more than the amount of General Motors outstanding bonds when it went bankrupt in 2009.

And the most resonant similarity with Enron is appearance of the name of a large audit firm, Ernst & Young, “they didn’t approve the Accounting Policy”, it rather “became comfortable with the Policy for purpose of auditing financial statements”. Two of the Lehman’s financial directors were in the past engaged in a collaboration with Ernst & Young. And in the last year of complete financial reporting, Lehman Brothers was the 8th largest customer for E&Y, and the fee paid by LB was about $185 millions.

Worrying is that we are not trying to learn from history and not to repeat the same mistakes, and those from Lehman Brothers walked the same steps of collapse as Enron did. They were not taken down by ill-intentioned short sellers and market manipulators, the company was bankrupt well before September 2008.

The implications of this failure on stakeholders:

The failure of Lehman Brothers in 2008 was the largest bankruptcy in US history. Financial markets did not respond well to the news of this bankruptcy filing as the Dow Jones Industrial Average (DJIA) declined by more than 500 points by the end of the trading session that day. We identify key dates surrounding the final months of Lehman Brothers’ existence and study the wealth effects experienced by shareholders of other financial institutions’ stocks. At one of the first signs of trouble for the 158 year old investment bank, we find that when Lehman Brothers announced their first quarterly loss, the stocks of depository institutions and primary dealers declined. Ultimately, on 15 September 2008 when Lehman Brothers filed for bankruptcy, the stocks of banks and primary dealers declined by 2.90% and 6.00%, respectively, and were the biggest losers that day. We also study how the size of the depository institutions may have played a role in the adverse effects they experienced surrounding Lehman's troubles. We present evidence that it was primarily large banks, savings and loans and brokerage firms who were impacted the most.

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