Introduction
Following the downfall of Lehman brothers, attention was focused on the role of regulators and credit rating agencies in the whole debacle. The public demanded for answers that were not forthcoming from all the concerned parties. This experience was to throw the Sarbanes-Oxley Act under close scrutiny and questions were abound as to how the act was not followed by all concerned parties. Credit rating agencies were blamed for coming up with false ratings on securities connected to subprime mortgages. Examples of these agencies are Moodys and Standard and Poors. They were found guilty of assigning exceptionally high ratings to the securities and also failing to reexamine the ratings based on the current environment at the time. There was also the issue of autonomy as it was found ha the rating agencies did not operate independently as there was conflict of interest in the rating firms. The rating agencies are often backed by the issuer who owns the bond that the same agencies rate.
At the heart of Lehman’s downfall was the evident accounting malpractice that was committed by both management and staff. The bosses and other members of staff were greedy in taking home more bonuses. Net profits were found to be manipulated in order to please the public in order to show how they were able to beat the earnings target. There was also the lack of transparency in how the managers dealt with subordinates who were found to have committed this malpractice. There was a clear lack of professional management within the organization (Tibman 23)
Securities and Exchange board
Out of all this, the major organization seen to be at the center of the blame is the Securities and Exchange board which seemed to have turned a blind eye in regulating and investigating complaints that had been raised before. The major cause within the board was its Consolidated Supervised Entities program which was supposed to check and investigate the investment’s bank liquid capability. The program required that an investment bank preserve adequate liquid asset that can last a year (Tibman 54). In Lehman’s case the SEC did not enforce this program despite acquiring enough evidence to enforce legal action against the investment bank. Following a series of stress tests which assesses the level of liquidity, the bank failed to show how it could endure a year without unsecured funding but was allowed to operate.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act was meant to ensure that no other melt down such as ENRON would be experienced again. The act gives mandates to company boards and accounting firms that are public in addition to transparent and full disclosure of accounting statements. The act also requires the SEC to regulate organizations and companies. The act seemed reliant on the SEC which at the time was compromised.Commercial banks issued subprime mortgages that had the full security of investment banks such as Lehman. At the time of enacting the act, the onset of such events had not been thought about and no one had imagined that such a blow to Lehman was coming. This was because of the way Lehman was making money out of collaterized debt obligations that were in doubt. In lay mans terms the bonds offered was backed by mortgage pools.
It is out of these events that have led to the general public perception that the agencies cannot prevent future accounting fraud. Many Americans questioned do not trust the same bodies that were responsible in aiding the whole economic mess that they are now experiencing.
New Regulation
There have been calls for new regulation following the debacle that followed Bear Stearns and Lehman Brothers (Tibman 102). Calls for the overhaul of Regulations touching on corporate governance have been voiced by scholars and policy makers. In a country where compliance is expensive, these voices are fast becoming the voice of the majority. A good example of how costly it is to comply is how it needs one to re-tool their IT systems and employing more executives dealing with compliance issues. There is also the increased cost of payment to audit committees.
Conclusion
The new regulations that are being called for can lead to a better and more transparent environment for organizations as it will be cheaper for them to audit and report to the authorities.
Work Cited
Tibman, Joseph. The Murder of Lehman Brothers: An Insider’s Look at the Global Meltdown. London: Oxford Publishers, 2009.