Window Dressing and Social Contract: A Study on Lehman Brothers and Coal-Fired Power Plants

This report discusses the unethical practices of Lehman Brothers in window dressing and violation of IASB conceptual framework. It also explores the impact of funding coal-fired power plants on the social contract and legitimacy of banks. Recommendations are provided for banks to respond to the information.

Adv Financial
Accounting

Contents
INTRODUCTION.................................................................................................................................4
Main Body.............................................................................................................................................4
Scenario: 1.............................................................................................................................................4
Explanation of the term ‘window dressing’ with respect to the provided case study’........................4
With the help of positive accounting theory as the ground of the arguments, explain why would
Lehman bank have tried to change the financial statements by knowledge of debts..........................5
Explain the qualitative elements of IASB conceptual framework that Lehman Brothers disobeyed..6
Discuss why firms are indulged in the window dressing of their financial statements when they
have relatively high debts in place of the lower - level debts.............................................................7
Scenario: 2.............................................................................................................................................7
Discuss why the banks would not prefer to reveal the information about funding coal fired plant
with the theory of ‘Social contract’...................................................................................................7
Give an opinion on whether the information given on this article would have impacted the
legitimacy of banks............................................................................................................................8
Give your recommendation on how the banks should respond to the information which is reflected
in this article......................................................................................................................................8
Elaborate the influence of Covid- 19 pandemic on financial reporting and disclosure practices with
relevance to the legitimacy theory.....................................................................................................9
CONCLUSION...................................................................................................................................11
References...........................................................................................................................................12

INTRODUCTION
Lehman Brothers holdings Inc was a company that had its dealings in the financial
services across the globe. It has around 25000 employees in the nation wide and was the
fourth- largest investment bank in the United States. But due to some situations and
circumstances it had to file for bankruptcy in the year 2008 (Kim 2021). This report looks
into the two scenarios where the first case explains the various practices and exercised that
were used by the Lehman Brothers to showcase the false financial position and status of the
company. Along with this it also explains the reasons for the manipulations in financial
statements done by the banks by using the positive accounting approach. It also contains the
qualitative features and elements of International Accounting Standard Boards conceptual
structure that Lehman Brothers have violated and also the reasons for why the firms are
involved in window- dressing in case of higher obligations and not on lower debts.
The second case this report talks about is on the article named after ‘Big Banks defend coal
loans’. And the discussion on social contract and reasons for the revealed information
regarding financing of coal- fired power plants in accordance with the extract. Moreover, this
report also encompasses the impact on perceived legitimacy by the information provided in
this case. Furthermore, it also gives the pointers on the influence of Nobel Corona Virus on
financial recording assuming the legitimacy theory.
Main Body
Scenario: 1
Explanation of the term ‘window dressing’ with respect to the provided case study’.
The word Window dressing can be explained as an act of making something appear in
a misleading favorable way. It takes place when the portfolio executives attempt to enhance
or uplift the performance of fund’s investment prior to the shareholders presentation. In this
scenario Lehman’s brothers presented misleading financial statements for the purpose of
getting loan from the financial institutions. Although the devoir to regain the collateral
securities stayed with Lehman only. After the issue of fiscal reports and records, the company
shall have utilized this loan by using its cash to repurchase its assets that were original. This
could have been possible by gaining them back again at 105 percent of their worth. As the
study depicts Senior Lehman directors and the accountants at Ernst & Young, they knew that
the debt containing of $50 billion was removed from their accounting statements, but the

CEO accepted that there were no mistakes in the report. The influence of Repo 105
transactions helped the firm to remove the bad assets of the amount $50 billion in the end of
2008. The value for which Repo 105 has allowed is of a very big amount and material in
nature which helped the firm in good presentation of the statement of financial position or
balance sheet. And this statement actually looked healthy. As provided with the intensive
analysis of Lehman’s brothers, Anton R. Valukas the invigilator of bankruptcy stated that
Lehman did not disclose the accounting practices and devices just to lower the leverages and
it came as a positive news in front of the investors and its shareholders. This all was a
deceitful practice that assisted Lehman in hiding the true and fair financial status of the
business concern. But as the study suggests, the public and the financial markets were highly
strung so Lehman had to take this step and was really crucial at that time frame. So, it can be
said that all such untruthful exercises refer to the window dressing enactment that cheated the
investors, creditors and other people who were intended to invest in the company which
resulted in a great deprivation to the interested parties and other public who trusted Lehman
Brothers and their abundance.
With the help of positive accounting theory as the ground of the arguments, explain why
would Lehman bank have tried to change the financial statements by knowledge of debts.
Positive accounting theory’s starting is the efficient markets hypothesis. The EMH is
constructed on the presupposition that the securities market represents in a well- organized
and impartial way to openly accessible data. The main capability of this kind of accounting
theory is that the speculations are formed in such a manner that they have potential of forgery
of knowledge derived from the actual incident in place of theory or concepts. It also makes an
effort to get insights on the connection between the managers, executives, market, firms,
supervisors and accounting data. In this case, Lehman Brothers knew that they had a great
amount of liability and debt but even then, it distorted its fiscal statements and balance sheet.
It is a positive accounting practice as shareholders, creditors and other interested parties are
someone who act as the backbone and foundation stone on which a company stands. In order
to invite the investments funds and raise money through funds it was necessary to represent
the misleading financial statements. The manipulation of the statement of financial position
was not presented to the shareholders of the banks. Not only this, but the footnotes regarding
the adjustments on particulars was not shown. The reason behind doing so was that to make
their monetary records look like as if the company is not dependent or reliable on loans. An
explanation using a hypothetical example is given below:

Let’s suppose the Lehman and brothers got $ 50 billion from its issuer and relocated $50
billion of assets. So, in this business transaction, it would be entered as sale under the Repo
105 and it will not be termed as a secured obligation. For this particular case the journal entry
that would be passed as- cash account will be debited for $50 billion and assets account shall
be credited for $ 50 billion (Kim., & Vandenberghe,2020).
Any business firm must manage and control its debt and equity to avoid future uncertainties
and risk. But Lehman Brothers failed to do so and had to face lot of risk, its business relied
on the loans. So, it can be seen from the above example that how Lehman Brothers have
made a use of Repo 105 to hide its actual position.
Explain the qualitative elements of IASB conceptual framework that Lehman Brothers
disobeyed.
IASB stands for Indian Accounting Standard Boards, it is the independent group of
specialists. Their objective is the basis for presenting the financial statements so that it
provides and ensures the comparability with the organization’s fiscal reports of previous year
and with other business firms. It provides the rules and regulations for their framework and
minimum requirements for the content. A conceptual framework can be termed as the
structure of objectives that results in the preparation of set of rules, principles and standards.
It broke the IARS principles as it recorded the Repo as its sales and did not treat it as loan. By
doing so Lehman Brothers it reflected as the cash transfers as the cash is going because of
acquiring an asset which resulted in hiding the firm’s liability. It led to the declination in the
leverage ratio of a bank. As, the repo was entered as sale in the transactions, so the
commitment of repaying the cash to its parties was not mentioned. This Repo 105 added up
to the dispute of interests and the serious breach of ethical exercises and conduct. Another
unethical practices that led to the breach of conceptual framework of International
Accounting Standard Boards were the window dressing, financial leverage, massive credit
default swaps (Urso, 2018). The management practices by Lehman Brothers were unethical
code of conduct, like manipulation of financial statement with the aim of seeking the
attraction of investors and shareholders that portrayed the different picture of firm than it
actually was. It disobeyed the concept and guidance on the presentation and disclosure by
hiding its real financial condition. It also ignored the procedure related to include the assets
and liabilities by showing the transferring the repo 105 as the cash for acquiring an asset and
also it did not reveal its true debts and obligations. It did not show the footnotes regarding the
recorded transactions in the balance sheet and the records were not presented to the

shareholders. So, these were the accounting standards and principles that were not followed
by the Lehman and brothers.
Discuss why firms are indulged in the window dressing of their financial statements
when they have relatively high debts in place of the lower - level debts.
Window dressing is an action of making the appearance of financial statements
appealing to gain the attraction and attention from the investors, creditors and the
shareholders. It is used in those business organizations where there are large number of
shareholders to provide the information that a company is well – organized in terms of
its assets and liabilities and is running very well. If a company wants to impress the
lenders like suppliers, creditors or other financial institutions to get approval for the
loans then this technique is adopted by the business firms. The theory or the practice of
window dressing is not an ethical exercise because it results in the misleading data and
figures. It is short- term in nature because it is required to make the present period
better. A company can manage its high-level debts by postponing the payment which is
made to be suppliers, so that the cash balance at the end of the period looks more than it
should be. In case of the big investment firms’ chances of debt increases so the
executives and fund managers for replacing the securities that are not performing well
with those stocks that are actually having good performance at the end of the
accounting period to boost up the appearance of their fiscal reports. The firms that have
relatively high- level debts are indulged in the action of window dressing they face the
red signal when their investments are less than the repayments as it leads to the
materiality. For example, if the company is having its cash flow statement in negative
then it should opt for some methods like by showing the reduction in its operational
costs. It can also fund its expenditure that are of revenue in nature by using the
practices that are not ethical. One more statement that justifies the line is that lower –
level of debts are the obligations that somehow a firm can manage by increasing the
sales revenue and by the internal source hence they do not need window dressing
mechanism (Wei., and et.al 2019). High level debts are difficult to control and if the
debt ratio of a company is higher then it signifies that the company is at more leveraged
position and will have to encounter the greater financial risk. Thus, the businesses shall
use the window- dressing tool to maintain good image of its organization in the eyes of
shareholders and investors.

Scenario: 2
Discuss why the banks would not prefer to reveal the information about funding coal
fired plant with the theory of ‘Social contract’.
Social contract is an imaginary contract between the members of arranged or
organized society and its leader that explains and bounds the rights and duties. The
banks would not have felt like disclosing the information on financing the coal fired
power plant because it is against the interest of society. As the society is getting very
much concerned about the problems like global warming and climate changes. So, if
the community is aware about such issues, then it expects same from the banks and
other authorities. It has expectation that the banks will encourage the environmentally
friendly methods and will inspire the policy holders and other person to look for the
ways that does not harm the environment. As coal- fired power plants causes air
pollution which gives an end to the diseases like asthma, heart and lung issues, cancer,
and other severe influences on the public health and other environmental issues.
So, all this clearly states that banks might be afraid of telling this to the public as they
have breached the social contract that have been discussed between them and the
society. The banks are funding coal fire power stations which is not at all acceptable by
the public because of the various and serious illness that it can cause to the members.
Another reason can be that, if the bank would have revealed about the funding on this
situation, then it might have led to the loss of support of various shareholders and
stakeholders.
Give an opinion on whether the information given on this article would have impacted the
legitimacy of banks.
As from the above discussion it gives a clarification on what the bank has done.
It has not abided by the rules and regulations that are stated in the Social Contract. It is
obvious that the extract from the article holds the full capability and potential to harm
the perceived legitimacy of the organisation because the bank has stepped back from
performing its obligations in lieu of society and environment. It has done something
which is against the interest of the members of community. Whatever the bank has
done is unexpected, as it operates by using the resources of the society so it should not
have taken this action.

Secondly, if the people were not aware about funding of such stations and they do not
support the existence of coal power fire stations then the media has the right and
potential to impact the legitimacy of banks in a negative and adverse manner.
Give your recommendation on how the banks should respond to the information which
is reflected in this article.
Opinions for the same are listed below:
 To maintain its image and reputation in the eyes of society and the stakeholders
group bank will have to give response on the data which is represented in the
extract. To be in the good books of community it should go for the corporate
disclosures. It can take a decision to drop the funding and leave their assistance
and support for the coal- fire- power stations and make this plan and strategic
public. Corporate disclosure can be great solution and can be of good help to the
government as they are inclusively crucial part in directing the judgements of
the public.
 Secondly, it can set up a union and invite the community members to explain
the benefits of such stations like the energy which is generated from such plants
is affordable and cheaper as compared to the other sources.
 Thirdly, banks can introduce many social responsibilities that it will perform to
cover- up the losses that will be incurred by setting up such stations.
 Fourth, without changing the decisions the bank can have words with the people
about the advantages that this new set – up will bring to the employment
opportunities etc.
Elaborate the influence of Covid- 19 pandemic on financial reporting and disclosure practices
with relevance to the legitimacy theory.
Legitimacy theory states that it is the prime duty of every business concern to
perform some social responsibilities and it operates by using the resources of the
society. This theory comprises the business’s activities in implementing, developing
and communicating its social responsibilities policies (Stekelorum, Laguir, & Elbaz
2018) . In short it states that these are the norms and guidelines created by the society
on which the business has to operate. The impact of covid- 19 had an adverse effect on
the economy as a whole. It has led to the ban on the various business activities, ceasing

operations of the firm for the time period which was not even definite, restrictions on
travelling, lockdowns. All this obviously affected the economy and society in a
negative manner and there were many bad consequences. It has influenced government,
intermediaries, financial institutions, creditors, investors and employees and many more
people. The stakeholders now want a glance to estimate the fiscal impressions of the
noble corona virus across the globe as if the disclosure is given on time, then the
decision can be taken.
This theory states the preparation of environmental and social reports so that it can be
used in the corporate’s financial statements to share the responsibility that a company
has performed towards the society to the shareholders. By disclosing such reports, the
business can get the help in attracting the investments from the interested parties. This
way will also assist in reducing the risks with respect to the downfall in the economy.
(Raimi, 2018).

CONCLUSION
From the above discussions it is clear that how Lehman Brothers conducted
fraud so that they not lose the interest of the shareholders. The report also gives the
clarification on the IARS regulatory framework. The report on the second case has
briefly explained the concept of social contract and legitimacy. Furthermore, it has
given the clear picture of why the firm shall perform its activities with respect to the
public interests. Moreover, it has also given the knowledge on the impact of covid-19
on financial records and corporate disclosures in terms of legitimacy.

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