Fraud
According to the COSO framework, there are five elements can be applied to analyze companies’ internal control systems. They are control environment, risk assessment, control activities, information and communication and monitoring. Here is my research of what went wrong in internal controls during the 2008 financial crisis using exhibit 6-6 with Lehman Brothers.
Control Environment
Lehman Brothers has a long history. Fuld led the company tide over the difficulties several times and achieve remarkable results when he was the CEO, which makes his power be sharply amplified among the Board of Directors. Form his criticism of Joseph Gregory Lee, the president and chief operating officer of Lehman Brothers, or his $34 million salary even in the turbulent year 2007, we can observe that he was overriding the internal control system of Lehman Brothers. This fact enables the board of directors to exercise oversight responsibility related to financial reporting and related internal control and results management are assigned inappropriate levels of authority and responsibility to facilitate effective internal control over financial reporting.
Risk Assessment
Company excessively pursuit of profits and ignore of the internal control risk management resulting the risky mortgages out of control. When Fuld was the CEO, Lehman Brothers vigorously developed high- risk, high -return business. From 2003 to 2007, profit of Lehman Brothers reached $ 16 billion and stock price increased around 29% annually. However, the leverage ratio of Lehman Brothers rose to 31:1; this made the firm very risky since it held only $1 of equity for $31 of debt. In its $ 800 billion balance sheet, the net asset value is only about $25 billion. The company was blinded by the great profit and failed to identify and analyze risks to the achievement of financial reporting objectives as a basis for determining how the risks should be managed.
Control Activities
Since 1993, Fuld, the CEP of Lehman
Control Environment
Lehman Brothers has a long history. Fuld led the company tide over the difficulties several times and achieve remarkable results when he was the CEO, which makes his power be sharply amplified among the Board of Directors. Form his criticism of Joseph Gregory Lee, the president and chief operating officer of Lehman Brothers, or his $34 million salary even in the turbulent year 2007, we can observe that he was overriding the internal control system of Lehman Brothers. This fact enables the board of directors to exercise oversight responsibility related to financial reporting and related internal control and results management are assigned inappropriate levels of authority and responsibility to facilitate effective internal control over financial reporting.
Risk Assessment
Company excessively pursuit of profits and ignore of the internal control risk management resulting the risky mortgages out of control. When Fuld was the CEO, Lehman Brothers vigorously developed high- risk, high -return business. From 2003 to 2007, profit of Lehman Brothers reached $ 16 billion and stock price increased around 29% annually. However, the leverage ratio of Lehman Brothers rose to 31:1; this made the firm very risky since it held only $1 of equity for $31 of debt. In its $ 800 billion balance sheet, the net asset value is only about $25 billion. The company was blinded by the great profit and failed to identify and analyze risks to the achievement of financial reporting objectives as a basis for determining how the risks should be managed.
Control Activities
Since 1993, Fuld, the CEP of Lehman