The Background Of Lehman Brothers Case Finance Essay

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Chapter 1 – Introduction

In this chapter, it will interpret the background of Lehman Brothers case; investigate of incident collapse, aim and objectives of the dissertation, and outline of dissertation.

Background of the study

Financial tsunami swept across in September 2008, it has triggered a global economic downturn as yet. Formerly, United States banking sector fall in a great liquidity and simultaneously around the world stock markets have fallen. Perhaps that, several large financial institutions and investment banking has collapsed or been bought out. That was a critical time in the history as well as governments have had to come up with rescue packages to bail out their financial systems.

In the matter of fact, the most curious question that many people would be eager to know what cause this financial tsunami swept across and led to global economic downturn. Besides that, many financial analysts believe that this crisis should be focused on the bankruptcy of Lehman Brothers which is the major part of the cause led to Global financial tsunami. Lehman Brothers was a global investment bank which is founded in 1850; it served the financial needs of corporations, governments, institutional clients, and high-net-worth individuals worldwide. Contemporaneously, the firm was headquartered in New York City, London and Tokyo; it had operated though a network of offices around the world therefore the bankruptcy of Lehman Brothers had to give rise to global financial crisis in 2008.

Formerly, Ernst & Young (EY) who was played the Lehman Brothers’ outside auditor role in longtime, certified the bank’s financial statements from 2001 until it filed for bankruptcy in September 2008. Unfortunately, the New York attorney general sued EY accused of hiding seriously troubles as well as helping Lehman Brothers to engage in a fraudulent financial accounting on Tuesday, December 2010. Another ways of saying that, EY was helping Lehman Brothers to used accounting gimmickry to misleading and masking the investors about the investment bank’s shaky finances situation. The following will probe deeply into the matter about the fraudulent financial accounting and its relationship linkages between corporate governance.

Investigation of Lehman Brothers collapse

Normally, the preparation and disclosure of true and fair financial information is central to corporate governance, as it provides stakeholders with a foundation to exercise their rights, in order to protect their interests (OECD, 1999). Nevertheless, earnings management and fraudulent financial accounting still existence, defined as the practice of distorting the true financial performance of a company (SEC, 1999, p.3) and it had obviously been showed that is an unethical practice which affects organization credibility often resulting in loss of capital, bankruptcy, de-listing in case of listed company. These recent accounting scandals perform that managers sometimes mislead stakeholders about the economic performance of their company. With this happen, they may produce financial statement that do not provide a true and fair representation of the company’s value.

Refer to the Lehman Brothers case, EY whose purpose was to move debt off its balance sheet, make it appear less leveraged therefore Lehman Brothers is open to suspicion of misrepresented in its financial statements.

Ideally, we find that fraudulent financial accounting and earnings management is significantly related with some of the corporate governance practices in this investigation. As the result of the previous research in more than 300 U.S. companies that effective governance practices proposed by several independent bodies (Joint Committee on Corporate Governance 2001; SEC 2000; ERC 1999; Cadbury Committee 1992) can reduce the likelihood of fraudulent financial accounting activities and earnings management.

Moreover, it has a large number of companies’ apparatus corporate governance to enhance stakeholder’s confidence; it is because company competition is more and more serious nowadays therefore internal control (IA) is a significant component of corporate governance, the company needs to apparatus an effective and efficient internal control to defend the company’s assets and shareholder’s investment. In Lehman Brothers case, it was an obvious exposition that reason of the biggest investment bank collapse. There was collapsed by losses on financial derivatives such as fraudulent financial accounting which caused by corporate governance failure or deficiency.

Apart from Lehman brother, there have other companies in failure of corporate governance, which have consisted various examples such as Enron, Satyam, Cadbury, and Xerox. The following will mention the significant of corporate governance and it’s affection of organizations. Thus that, failure in corporate governance or corporate governance deficiency is the major reasons in this serious case.

1.3 Aim and objectives of the dissertation

From the financial tsunami it caused by the Lehman Brothers crisis in 2008 therefore the purpose of this paper is to investigate the crisis with the fraudulent accounting and the relationship with it impaction on corporate governance. In particular, we examine the relationship between fraudulent financial accounting and the corporate governance practices. The motivation for this study comes from the U.S. Securities and Exchange Commission’s (SEC) concerns about earnings management (Levitts 1998) and the corporate governance.

In this case also examine several reasons behind the fall of Lehman Brothers, besides, it was not only to understanding the linkages between earnings management and corporate governance, simultaneously understanding the development of corporate governance regulation from 2001 to 2010.

1.4 Outline of dissertation

The reminder of our dissertation is organized as follow. In chapter two is literature review, which will interpret financial tsunami in 2008 and how Lehman brothers collapses is influencing the crisis appearance. Chapter three is investigation review; it will explain the intention of Lehman brothers in terms of fraudulent financial accounting and earnings management. Afterwards, Chapter four is in deeply investigates the linkage between the fraudulent financial accounting and corporate governance; meanwhile, it will describe the changes of corporate governance regulation and its significance. In Chapter five will interpret the corporate governance deficiencies impaction on the company’s management, the audit profession and the regulatory bodies, it will discuss that ways to build up the effective corporate governance to reduce the likelihood of fraudulent financial accounting. At last, it will come to conclusion of the dissertation and some perspectives about Lehman brother case in chapter six of conclusion.

.Chapter 2 – Literature review

2.1 Introduction of financial tsunami

This section will review the concept of financial tsunami and give further explanations .Therefore to understanding the process and the effects of financial tsunami.

The financial tsunami doesn’t have specific definitions, but it will have different impaction among different people. Moreover that it makes confusion among readers and some investors. Nonetheless, the term “Financial tsunami” has been used very regularly in 2008. It could be define as a sudden loss of confidence in country’s currency or sudden decline in value of money otherwise it could be applied unambiguously to different situation in which some assets, financial institutions or investment bank suddenly lose a large part of their value. Within this difficult financial situation, it might have many international investors or other financial assets withdraw their funds form the country therefore a large number of financial institutions or investment banking may downturn their business, perhaps that it will collapse or bankruptcy. Because it has no choice with many investments banking other than not to trade leading many big companies therefore it could be lose their business possibly.

2.2 Major cause of financial tsunami in 2008

The global financial tsunami came to the forefront of the business in September 2008 with the failure of large number financial companies in American as well as the biggest investment banking – Lehman Brothers had been bankruptcy. Simultaneously, Lehman Brothers could be a minor event or incident that led to big trouble like financial tsunami. On September, 2008, Lehman Brothers filed for bankruptcy. It has more than $619 billion in debt and $639 billion in assets. Lehman Brother’s bankruptcy was the largest in history, which obviously showed that its assets far excel those of previous bankrupt goliath such as Enron and WorldCom. Since the Lehman Brother was one of the biggest investment banking, and they have the worldwide investors. Thus, when Lehman’s demised it have shocked the world and widely affected the global financial market. Whereby the Lehman Brother subprime mortgage that influence though global financial market in 2008. Moreover, this collapse was a seminal event that greatly intensified the 2008 crisis. (Investopedia Staff 2009).

2.3 Causes and effects of the Lehman Brothers bankruptcy

Somebody argue that the demise of Lehman Brothers is the result of its very aggressive leverage policy in the context of a major financial crisis. (Luigi Zingales 2008). Moreover, this section described in deeply about the causes and effects of the Lehman Brothers bankruptcy. It will start by explaining the three reasons of the Lehman Brothers bankruptcy and also will discuss how Lehman Brothers contributed to its own demise and what the effects of its.

Furthermore, the reasons could be divided into two groups, the Lehman financial policy and the fraudulent financial accounting.

2.3 (a) Lehman financial policies

In the Lehman Brothers case, this problem was aggravated by two factors, one is the short-term debt financing with strong reliance, and the other could be the extremely high level of leverage. In particular, all of the commercial banks are regulated and it cannot leverage their equity more than fifteen to one. Surprisingly, Lehman Brothers had a leverage of more than thirty to one at the beginning of the financial tsunami in 2008. It can be interpreting in an example that only $4.30 of equity for every $100 of loans. With this leverage, it has 4.3% drops in the value of assets wipes out the entire value of equity and makes the company bankruptcy easily.

Furthermore, Lehman brothers extensive use of short-term debts have caused the leverage problems and created an unstable financial situation to the firm. In fact, it financed more the fifty percent of asset at the beginning of the financial tsunami in 2008. In this low interest rate environment, investors’ reliance on short – term financing is extremely profitable, but simultaneously increases the risk that if most of “runs” similar to the ones bank face when they are rumored to be bankruptcy. (Luigi Zingales 2008). However, the solvency of the borrower, it could be makes the short – term lenders leery to renew their lending. If the lenders have doubted of the borrower’s repayment ability ,they may withdraw their funds, then the borrower will facing a liquidity shortage, which cannot be easily dealt in 2008’s economic condition.

After the beginning of financial tsunami, Lehman Brothers did try to reduce its leverage to standard level and reduce its reliance on short term debts. But it was too little and too late. At the last time, Lehman Brothers succumbed and filed insolvent.

Chapter 3 — investigation review

3.1 Fraudulent financial accounting

Besides, fraudulent financial accounting could be the major cause of the Lehman Brothers bankruptcy. The report into the collapse of Lehman Brothers cites manipulation of accounting transactions in attempts to cover up the bank’s losses, remove debts of its balance sheet and make it appear less leveraged. This was done through by Repo 105 which is Lehman Brothers never disclosed its transactions publicly. Repo 105 transactions can be interpret as sale and repurchase agreements, it might used to remove some transactions off the balance sheet temporarily, so as to conceal the real financial situation of the firm. In fact, it can temporarily to get the investors’ confidence, by misleading stakeholders about the economic performance of their company in long run. According to Anton Valukas and Andrew Cuomo, Lehman used to move more than fifty billion debts off its balance sheet; it should be take it as fraudulent financial accounting in the nutshell

Besides that, fraudulent financial accounting defined as the reporting of earnings or cash flow figures that do not reflect the true underlying performance or trend, or that provide a poor and deceptive guidance to future earnings or cash flow (Raymund Breu 2001).

3.2 Motivation of Fraudulent financial accounting

Earnings management and fraudulent financial accounting have important economic consequences. Nowadays, many counties have faced that as a seriously problems in listing companies. Whereby the recent research. it showed that some other incentives of fraudulent financial accounting. Normally, a frequent incentive for fraudulent financial accounting that actually improves the company’s financial performance to obtain a higher price from a stock or debts offering or to meet the investor expectations of the company. Other than that, incentive may be the wishes to postpone dealing with financial difficulties such as violating a restrictive debt covenant or incentive in personal gain such as promotion, additional compensation etc.

According to different purposes of the incentives of fraudulent financial accounting and earnings management, it may divide into three groups of examples. One is the intention of misleading capital market with purpose, two is the intention of seeking private gain or occupy other partners’ interest and the last could be the incentive of obtaining comparative performance advantages. And the following is going to describe these reasons.

3.2 (a) Intention of misleading capital market with purpose

Before 1960s management was using their authorities in company to carry out earnings management as they cheated and pleased the investors that is widely accepted. However, investors were not always deceived by accounting surplus due to information competition in 1960s. There was a great chasm between the two conclusions after the research of testing above two contradictory ideas in 1970s

Although the conflicts of the conclusions were exist. Ideally, the research was obviously showed that most of the listed companies made use of fraudulent financial accounting to cheat investors happened frequently. Such as Yinguangxia Event, Hongguang Industry Event, etc. which occurred in capital market of china, demonstrated that listed companies with the intention of misleading capital market did exist. Therefore, investors or stakeholders of the capital market had not actually seen though the company’s profit management in long period.

3.2 (a) Intention of seeking private gain or occupy other partners’ interest

Under the company framework theory, the company or the enterprise can be regarded as a combinative point in the complicate contract relations of its interest group. For example: government, employees, creditors, managers and shareholders. Each of them has indeed seen though and understand that its own interest was totally depends on development and living of the company.

In the matter of fact, there are conflicts of interest among them therefore they will have a succession of action and behaviors of reducing the company’s value and living opportunities in order to seek private gain and occupy other partners’ interest.

After that, the behavior of earnings management is inevitable, whereby the incompleteness of the contract, high cost of supervision which will tempt managers to pursue private profit though fraudulent financial accounting.

Therefore there are many literatures which have tested earnings management based on the incentive of debts and payment contract in foreign countries. As a result, these researches have made known obviously that debts contract and payment contract are at least one causes of earnings management of some companies.

3.2 (c) Incentive of obtaining comparative performance advantages

Nowadays, most of the listed companies will carry out fraudulent financial accounting probably aimed to obtaining comparative performance advantages against their competitors. After researched in number of more than five-hundred investors, which indeed made known obviously the mainly causes almost lied in. The creditors and investors often compared financial performance with competing companies when they made credit decision ; Simultaneously, when they confirmed the salary of managers, company’s financial performance could be a major factor in consideration. Moreover that, fraudulent financial accounting is quite difficult avoid, and it is inevitable around global economic environment.

According to the Kallunki and Martikainen research paper, they investigated the fraudulent financial accounting of some listing companies in Finland, which considered widely range of other companies’ fraudulent financial accounting in the same trade. As a result, they mainly thought about the permanent part of average surplus changes in trade when listing companies fixed the object level of fraudulent financial accounting. (WANG Li-gui. 2008). There was totally supported the hypothesis of comparative performance advantages. In the meanwhile, fraudulent financial accounting also has some problem among several companies as non-cooperative dynamic game .They though fraudulent financial accounting that would manage its own surplus simply, because it anticipated its competitors might conduct it in order to gain comparative advantages under the pressure of performance completion among companies. For example, Cadbury plc which is a British confectionery company, its financial statement misstatement in June 2005 to 2006. The Securities and Exchange Commission (SEC) was discovered that monumental overstated of company’s profit to the tune of approximately thirteen billion within 2003 to 2006. From the annual report of Cadbury in 2005, SEC concerned on certain areas of the report, which including worsening leverage ratio, inadequate disclosure, declining profitability and non compliance with corporate governance.

In this example which showed that obviously most of the listed company likely to obtaining comparative advantages and evading supervision with purpose thought fraudulent financial accounting.

Chapter 4 — investigation review

4.1 Linkage between fraudulent financial accounting and the corporate governance in company

This section investigates whether a company’s corporate governance practices have an influence on the quality of financial information in publicly released. In February 1999, Blue Ribbon Committee (BRC) issued ten recommendations to enhance the reliability and credibility of financial statement by improving the functioning of corporate governance of public companies. In recent year, the Securities and Exchange Commission (SEC), American Stock Exchange (AMEX), New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) increased their requirements regarding corporate governance and audit committee as well as an independence, activities and disclosure. In term of new recommendations, it can realize that good governance practices in company help to enhance the reliability of financial information. As the result of the previous research, it examined more than 300 U.S. companies with the relationship between fraudulent financial accounting and the corporate governance. Ideally, this research suggested that good corporate governance will reduce the likelihood of fraudulent financial accounting.

In term of an earnings management, it is significant related to some corporate governance practices such as audit committee and the board of directors. It is due to the audit committees with a clear mandate for monitoring the financial information and reporting with compliance, with a higher proportion of third parties who is not managers in those companies, or with at least one expert in company. Therefore, it can significantly less likely to have high levels of earnings management, for example, Beasley (1996), it also find that some board of directors characteristics have a significant influence on the quality of financial reporting and information. if an independently board members and directors both with the company and with other companies decreases the likelihood of high earnings management.

After that, effective governance practices proposed by several independent bodies (Joint Committee on Corporate Governance 2001; SEC 2000; ERC 1999; Cadbury Committee 1992) actually not only reduce the likelihood of fraudulent financial accounting activities, meanwhile, it can also reduce the likelihood of the earnings management activities.

4.2 Introduction of corporate governance

Nowadays, corporate governance it takes more and more serious in several companies’ competition. The strength is an effective corporate governance not only to reduce the likelihood of earnings management and fraudulent financial accounting activities. Ideally, it also can strengthen private investment, corporate performance, and economic growth. In term of developing countries, it simultaneously remain competition, excite their capital and ensure combat corruption. Therefore, the companies actually need to put in place effective governance institution. Corporate governance refers to the rules and incentives by which the management of a company is directed and controlled to maximize the profitability and long-term value of the firm for shareholders while taking into account the interests of other legitimate stakeholders as well as creditors, debtors, employees, investors and shareholders etc. (Stone, Hurley, and Khemani 1998). The responsibility of building up effective corporate governance is the most serious thing with the companies need to concern.

4.3 The significant of corporate governance

The World Bank former president, James Wolfensohn noted that corporate governance is now serious to the world economy as the government of counties. (James Wolfensohn, 2008). In the matter of fact, there perception of corporate governance is an important ingredient of the image of any companies, as well as private, public or non-profit making companies or organizations. In particularly, effective corporate governance image enhances the reputation of the companies and also make it more attractive to stakeholders.

In Lehman Brothers case, it was collapsed by the cause of failure and weaknesses in corporate governance. It had some financial expert to establish that corporate governance routines did not serve their purpose to safeguard against excessive risk taking in Lehman. The following will interpret the corporate governance from 1980s to 2010. It cans deeply understanding the cause of changes and its affection to companies, by the way it will mainly discuss in 2008 to 2010.

4.4 Corporate governance developments in the UK

In 1980s, this is the beginning of the initial corporate governance developments in the UK, it was opened the big door of the companies policy regarding the corporate governance. In early 1990s, the corporate scandals were in wake such as Polly Peck and Maxwell. With this corporate scandals led to establishment of “Financial Aspects of Corporate Governance Committee”, which hope to reduce the financial reporting irregularities. In 1992, there was outlined a number of recommendations such as segregation of duty between the company’s chief and chairman. It could balancing the composition of the board and getting rise of transparency of financial reporting and also obtaining the effective internal control of the company.

After that, the following concerns regarding directs’ pay and share options in 1995, it could recommended to disclose in annual reports and recommended to established the remuneration committee. From 1998 to 2003 Combined Codes required all companies need to provide a statement in their annual report regarding as how they have applied the code principle in company and the code provision relating to internal control.

Surprisingly, the Enron’s financial scandal in 2001 was happened, which finally led to the bankruptcy of the Enron Corporation. Enron was one of the five largest accountancy and audit firms around the world. Enron was involved the lagers corporate scandals, which undoubtedly was the seriously audit failure and corporate deficiencies. As the result of Enron bankruptcy with the corporate scandals happened in 2001 therefore it had new regulations and legislation were representing to expand the reliability of financial reporting for all companies in 2002 to reduce the possibly of bankruptcy like Enron’s financial crisis happen again. In 2002, Sarbanes-Oxley Act was announced and established in U.S to issued major changes in regulation of corporate governance and financial practice. Although, the Sarbanes-Oxley Act was announced, which can be consider as an implement taken to reduce the likelihood of fraudulent financial activities, however, fraudulent financial accounting activities still existence.

In 2008, corporate governance deficiencies and failure is the most seriously things in global financial market. Since seven years Enron placed corporate governance under the spotlight, the recent global financial crisis has renewed that focus (KINGSTON CITY GROUP, 2003). New financial crisis was beginning with the bankruptcy of Lehman Brothers in September 2008.

This financial crisis has instant governments across the world to re-evaluate their financial regulatory framework as well as U.K. Government has taken action to contain and prevent future crises in financial market and more focusing on stablilsing the banking system to protect people’s saving and investment.

After reviewed the causes of the global financial crisis by Loard Tuener in October 2008. Mainly, U.K. Government had outlines recommendations on redesign of regulation and intent to create a more powerful banking system for the future. What is more, U.K. Government had also focused on the improvements in effectiveness of internal control, risk management, and corporate governance after the Lehman Brother crisis.

To sum up, it had significantly changing in regulation until 2008 to 2010, cause of the Lehman Brothers collapsed and corporate governance had mainly focused again after 2008. Afterward, it will describe the impaction of fraudulent financial accounting and earnings management and its relationships with corporate governance mechanisms.

Chapter 5 — investigation review

5.1 The impaction of corporate governance deficiency

In the fast changing business scenario, effective corporate governance is highly required in achieving long term corporate goal. And the positive effect of effective corporate governance on several stakeholders, that is strengthened economy ultimately. Moreover that effective corporate governance is an implement for socio-economic development.

But nowadays, it is more and more accounting scandals and fraud are damaging the accounting profession. And that is due to the corporate governance deficiencies, which issued an unethical practice to making financial statement unreliable and can drag the economy into a recession. Therefore, corporate goverance had develop in regulation more powerful of governance in all listed company which in term of possibility to avoid any fraud and irregular in financial statement.

In this paper, it focuses in some high discussed corporate governance mechanisms as well as company management, internal and external auditors, and regulatory bodies. In following, it will to interpret the impaction of fraudulent financial accounting and earnings management and its relationships with these three groups of corporate governance mechanisms.

5.1 (a) Company’s management & Regulatory bodies – Board of Director and CEO

In particularly, corporate governance mechanisms usually include the reulatory bodies and some company top managements as well as the Chief Executive Officer, the board of directors, management etc. A board of directors often plays a important role in corporate governance and alsoneed to ensure accountability of the company to its owners and authorities.

Besides that, the board is controlled by chairman of board and CEO whose are combination of the top management team in the company. When the chairman also serves as CEO, the board absolutely dominated by insiders.

As the result of this, it actually leads to weakness of board’s supervisory independence, simultaneously increase the probability for managements to engage in earnings management and have also incentive to mislead of external investors on fraudulent financial accounting. (Jensen 1993). Whereby this case, it can be expected that when the company without independence between chairman of board and CEO are more likely of fraudulent financial accounting and earnings management.

Moreover. in this situation the board is controlled by top management team and the occurrence of financial statement fraud are positively related (Dan Yang & Roger Buckland 2010).

Corporate governacne deficiencies could be impact and engage the company management in earnings management and fraudulent financial accounting. Besides that, it had to segregation of duty, like independent directior, who is a member of board of directors simultaneously is differentiated from inside director, gray director and related director. Because they do not from part of the executive management team in company and also are not invloved in day-to-day operation of business. With this situation, the listed companies with great independent directors in terms of effective corporate governance policy are less likely to engage in financial statement fraud. In additions, segregation of duty which is announced and established in 1990s of strengthened economy and it was in common use in all listed companies.

Although separation of ownership and management actually plays an independent role. But it also lead to a seriously problem such as agency problems. These problems are potentially harmful to the company and its owners and may actually lead to ineffciencies and wealth destruction.

5.1 (b) Audit professions – Internal and external auditors

In terms of internal audiors like audit committee is one important mechanism of corporate governance. In (Beasley 1996, Dechow et al. 1996, McMullen 1996) research which indicates that ineffective audit committees or no audit committee in company are more likely to engage in financial statement fraud and earnings management. In the meanwhile, (DeFond and Jambalvo 1994) find that effective audit committee have less fraudulent financial accouting and earnings management in company. Moreover that, NASD and NYSE have addressed and highlighted that listed companies should set up audit committee and issued its functions in 2002, and issed more than ten recommedations and five guiding principles intended at improving audit committee members’ independence and qualification to make sure it have a reliable financial reporting and its process.

Afterwards, accounting information was disclosed in public held by external auditors, who is responsible for assuring financial reports free of material misstatement, and to detecting financial statement fraud and errors. In the matter of fact, whereby the Lehman Brothers’ case, it should be consider as the audit-client relationship lengthens, the external auditors may easily develop personal friendships simultaneously develop an economic dependency on audit clients. Actually, it will impairs audit independence and auditing quality. In the meantime, it had obviously been showed that corporate governance had material deficiency in terms of external auditor regulations.

Therefore, corporate governance had highlighted that listed companies need to enhance external auditor independence include requiring auditors to act exclusively as auditors and also strengthening the independence of regulatory agencies and establishing agencies specifically to monitor auditors of major companies (Mitchell and Sikka, 1993). In fact, it may be reducing the likelihood of fraudulent financial accounting, and this result is to attribute the success to the corporate governance development.

5.2 Effective Corporate Governance

Whereby the above investigations and the Lehman Brothers case, it obviously been showed that good coporate governance (CGC) is highly recommended in all listed companies.

Effective corporate governance is defined as the same as CGC which is in a corporate set up leads to maximize the shareholders wealth and ensuring equity and transparency to every stakeholder simultaneously ensuring the company on the sustainable basis and long-term productivity growth. In additions, it absolutly provided less-fraud environment in all listed companies of having an effective governace. In the meanwhile, it is a source of competitive advantage in global economic market.

Chapter 6 – Conclusion

In summary, this paper examines the linkage between fraudulent financial accounting and corporate governance in the context of a large economy. The focus on Lehman Brothers’ case 2008 enables us to explore whether good corporate governance that are effective in reducing the fraudulent financial accounting appearance. In the meanwhile, it can explore whether corporate governance deficiencies that are actually push over several largest financial institutional bank and investment bank. Earlier studies have considered corporate governance is just ensuring the company on the sustainable basis or in long-term productivity growth. In this study, it considered a much wider set of corporate governance to understand the significant and its affection in terms of bad governance as well as financial fraud.

Using examined more than 300 U.S. companies with the relationship between fraudulent financial accounting and the corporate governance.

Finally, it find that fraudulent financial accouting appearance is due to the corporate governance deficiencies which simultaneously arised Lehman Brother collapsed to triggered the explosion of global financial crisis in 2008.

Besides that, corporate governance had plays a major role of the company policy. If the Lehman Brothers was strengthen their corporate governance before collapsed. It trust that Lehman Brothers still subsistence.