Ethical Issue in Financial Market: Term Paper

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" The code also states when communicating investment information care must be taken to ensure that it is fair, accurate and complete as well as make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer.

Evidence indicates Lehman's senior financial executives knew of the Repo 105 transactions and certified the accuracy of Lehman's financial statements and disclosures despite having full knowledge that the company had engaged in the use of these transactions to hide their toxic assets and make their financial statements appear to be in good health when, in reality, they were not. These executives were fully aware that the financial statements were misleading and did not fairly present the true position of the company.

Hiding toxic assets and releasing favorable financial statements to investors each quarter clearly was intended to deceive investors and the public in general. This practice showed a favorable and healthy Lehman Brothers when in fact this was not the case. This action clearly misrepresented the financial position of Lehman and resulted in an inflation of the market price of the firm's securities.

Additionally, the Lehman executives received compensation that was based on the favorable financial statements produced by the company. Many of these senior executives benefited greatly by receiving huge compensation, bonuses, and stock grants (Jeffers). Information was manipulated by Lehman's executives in their own favor and for their personal benefit to the detriment of their investors and other principals.

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Lehmann's accounting practices constituted a conflict of interest and a serious breach of ethical conduct.

In June of 1012 the Accountability and Actuarial Board (AADB) concluded that no action should be taken against accountant Ernst and Young (E & Y) or any individuals in connection with the auditing of Lehmann Brother's before the September 2008 collapse. The AADB announced there is no realistic prospect of an adverse finding against E & Y or members within that firm and the investigation was closed (Treanor).

Conclusion

The use of Repo 105 by Lehman Brothers to hide their toxic mortgages from the public and show a favorable financial position has raised the question of the legal and ethical duties of businesses to their clients and the public. Many feel Lehman's management acted dishonorably by violating ethical and professional standards of conduct in its actions with respect to the use of Repo 105 and they also violated the requirements of the Sarbanes-Oxley Act of 2002 by stating that the financial statements were fairly stated when indeed they were misleading. It seems evident that Lehman engaged in conflict of interest activities and failed to adequately protect their investors.

The methods of accounting used by Lehmann disguised the company's real problems. Today its bankruptcy has become part of a growing history of business failures where accounting principles have become the focus. This failure is a reminder that financial reporting must remain transparent so that users may make informed decisions with confidence.

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