By Pete Miller, CPA|CFE, and Mike Nurse, CPA|CFE|CGMA

Has cheating and fraud always been a part of human history? According to Andrew Beattie in his article “The Pioneers of Financial Fraud,” evidence of fraud stretches all the way back to 300 B.C. when a Greek merchant named Hegestratos orchestrated a loan fraud that ultimately ended in his demise. In modern times, stories of financial fraud and corporate scandals have become ubiquitous in daily news feeds, providing a critical call to action for anyone involved in business.

For National Fraud Awareness week, we are highlighting five of the largest accounting scandals in U.S. history. Each day, we will bring you a short description of a prolific fraud in the hopes that raised awareness will ultimately help us to understand and mitigate fraud risk. In doing so, we can help to ensure ethical and sound business practices, which will benefit society as a whole.

“Whoever is detected in a shameful fraud is ever after not believed even if they speak the truth.” – Phaedrus, Roman fabulist, 15-50 B.C.

With a rich and varied history, Lehman Brothers began as a small grocery and dry goods shop in Montgomery, Alabama in 1844 and eventually grew to become a commodities trading business. In 1847, the firm became a member of the New York Stock Exchange and began selling and trading securities. Fast forward 164 years, and Lehman Brothers had become a global financial services firm and the fourth-largest investment bank in the U.S., with 25,000 employees doing business in areas such as investment banking, equity and fixed-income sales and trading, investment management, private equity and private banking.

Lehman Brothers would eventually become embroiled in the subprime mortgage crisis in the late 2000s (due to the acquisition of several subprime lenders). In 2007, defaults on subprime mortgages had risen to a seven-year high, as the U.S. was hurtling head-first into a housing market crisis. In late 2008, Lehman Brothers ended up being forced into the largest bankruptcy in U.S. history, which some argue triggered the broader collapse and recession. This is when the fraud was uncovered.

Lehman executives were accused of hiding over $50 billion in loans disguised as sales (which were approved by the firm’s auditor Ernst & Young). They did this by allegedly selling toxic assets to Cayman Island banks with the understanding that they would be bought back eventually. This transaction created the illusion that Lehman had $50 billion more in cash and $50 billion less in toxic assets than it really did.

Two years later, Richard Fuld, Leman’s former CEO, would say that he had “no recollection whatsoever” of the accounting maneuvers resulting in the fraud. To date, no executives at Lehman have faced prosecution for to the series of events related to the mortgage fraud.

Takeaway:  A lot of things went wrong in this case. Unfortunately, when things get this tangled it can be difficult to unravel and detect the issues. The staggering reality of the financial crisis for which sub-prime lending and Lehman Brothers is at least partially credited, is that the consequences to the people involved were not nearly as dire as the circumstances in which the victims found themselves. No executives at Lehman Brothers were prosecuted. On a smaller scale, if an executive at a privately held widget manufacturer were to misappropriate $5 million dollars and not face severe consequences – for instance, termination of employment, civil lawsuit, or criminal charges – that sends a message to the people that remain at the company that fraudulent behavior is worth the risk. Are we sending the message here that Lehman Brothers’ behavior was worth the risk? We may not know until the next major financial scandal is upon us.

Co-author Mike Nurse is a manager in the Accounting and Consulting Group at Clark Nuber PS. Reach him at

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This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.