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ACC707 Auditing Assurance and Services Assignment
Auditors are persons who are responsible for presenting true and fair view of financial position of company. Auditors are responsible for disclosing all the relevant facts related to company to ensure that accounts of companies are prepared in confirmation with generally accepted accounting principles. If an auditor complies with all his duties fairly then no company can be able to conduct any fraud. They are the auditors of company who are involved in such kind of fraud which results to global financial crisis as in the case of Lehman Brothers. This involvement of auditor results to non-disclosure of the relevant facts and thus companies are able to conduct fraud which results to global financial crisis. This proves that they are auditor only who are responsible for such kind of scandals so if auditors performs their duties properly then economy of such country does not have to face such financial crisis.
Lehman brother case study
Lehman Brothers was the fourth investment bank in America and a case for bankruptcy against Lehman Brothers was filed in 2008. The main scandal in which Lehman Brothers was involved is for not following business ethics as well as misleading its stakeholders through disclosing wrong financial statements. This case is the largest bankruptcy case in history where Lehman Brothers neglected the financial risks involved in their business which finally led to bankruptcy. This all started when Lehman Brothers intended to overtake its competitors. In support for this Lehman Brothers started making major changes in their business strategy (Bris, 2010). In order to make more money they moved towards low risk to high-risk strategies. There were three major areas for investment of Lehman Brothers which were real estate, leveraged loans and private equity.
Lehman Brothers was very much involved in providing unsecured loans to people and as there was no security in these loans so interest rate for these loans were high. These loans were known as subprime loans. These loans became very much famous because of no security. Lehman Brothers earned so much of revenue from these loans (Yorulmazer, 2014). The main aim of Lehman Brothers was to grant loan and turn them into securities. All this ended in 2006 when the interest rates started getting higher and then people realized that these securities are risky when the saw increasing interest rates. In this situation Lehman Brothers was stuck with these assets with the lowering prices. Even the demand for the real estate starting felling. This causes a complete downfall for Lehman Brothers. This made difficult for Lehman Brothers to sell its assets and in that year Lehman Brothers showed its balance sheet with high liquidity to its stakeholders. After that in 2008 Lehman Brothers announced a quarterly loss of $3.9 Billion and after that no bank was ready to give finance to them. Stakeholders of Lehman Brothers were not ready to invest in it. Even the government denied to help them and this results to at last on September 15, 2008 bankruptcy was filed by Lehman Brothers. (Chadha 2016)
Role of auditors and their liability in Lehman Brothers case
One of accounting firms in big four accounting firms that is Ernst & Young were auditors of Lehman Brothers. In this case EY was supposed to disclose all the relevant facts regarding Lehman Brothers to its stakeholders but it failed to do so. When Lehman Brothers filed for bankruptcy, it was discovered that EY was aware of all the acts by Lehman Brother but EY does not disclose all such facts (Liu & Schaefer, 2011). This was proved that EY knew all about this scandal and financial position of Lehman Brothers but regardless of these facts it failed to fulfill its duties for disclosing these facts. When EY was questioned it said that it has not done anything wrong but the bankruptcy examiner of Lehman Brothers concluded that EY was involved with Lehman Brothers in this scandal and they failed to perform their duties as an auditor. There was no accounting done related to Repo 105, NPA’s of Lehman Brothers were no recorded by auditors.
Impact of this case on economy in context of global financial crisis
Lehman Brothers case gave rise to global financial crisis. This results to failure of business ethics. This case is a proof for effect of a single institution on global economies. Lehman Brothers case just not affected economy of US but also economy of other countries. According to Burkhanov (2011), with the bankruptcy of the fourth largest investment bank there occurs a chain of economies disaster from this point. This event causes series of disaster which affected the US as well as world economy to the large extent. Lehman brothers issued commercial papers that were invalid that leads to havoc among the investors and banks. Due to which commercial paper market seized to the greatest limit that ultimately leads to reluctance by bank towards the short term lending to the investors. Recession has occurred in the US market in early 2008 but with the Lehman brothers case the market of US faces a huge blow. Apart from that world trade also get affected that causes a tremendous problems in the world economy. Like in japan the export rate drops with 57% rate from the previous year. Similarly, Germany and China rate also drops drastically with the case occurrence in the economy. US, Germany and China were affected the most as these countries has built there economy on the credit basis as with the breakdown of the major bank it was affected the most. Apart from that leverage, credit and housing is also affected by the crises as economy is built on this parameters only. Along with that HBOS’s one of the biggest lender of mortgage in Britain was also affected drastically. As its shares down by 34% after the downfall of Lehman brothers (Burkhanov, 2011). London stock exchange was affected the most that causes huge blow to the largest and leading company of the Britain. As FTSE falls below 4000 points that leads to loss in billions to the most prestigious companies of the world. This disaster symbolizes one of the largest financial crises that leads to wealth destruction. Apart from that aggressive investors turned into conservative investors (Gyamf, 2016).
Duties of an auditor
An auditor plays a major role in any organization. It is the utmost duty of an auditor to present true and fair view of financial position of organization. Auditor of organization is responsible for disclosing all the material facts that are related to the financial statement of organization. An auditor should ensure with the compliance of all the relevant laws and provisions that are applicable to organization. In this regard an auditor has some duties which he should follow which are as follows.
- Duty to make inquiries: An auditor must inquire about all relevant documents and information that are required for his audit to provide a true and fair view of financial position of company (Pandya, 2013).
- Duty to examine accounts properly: An auditor must examine the accounts of companies properly along with compliance of relevant accounting policies and procedures.
- Duty to detect and prevent fraud: An auditor must detect and prevent fraud in the company. He must not be involved in any fraud which is conducted by company. If any auditor finds that company is conducting any such fraud then he must report the stakeholders of company regarding that frauds.
- Duty to give audit report to for examination of accounts: An auditor must provide a fair audit report to the management and stakeholders of company so that they could know about true and fair view of financial position of company through the audit report ((Pandya, 2013).
- Duty to comply with provisions of generally accepted accounting principles: An auditor must follow all the rules and regulations during examination of accounts that are applicable to company as well as he must ensure that accounts of company are prepared keeping in view the provisions of generally accepted accounting principles.
- Duty to make disclosures of all relevant facts: An auditor must disclose all the relevant facts that are related to company to management and its stakeholders. An auditor must not involve himself in any fraud which is conducted by company. It is the utmost duty of an auditor to identify all the material facts that are related to company so that company can fulfill all the compliance and provisions that are applicable to it.
An auditor must fulfill all his duties properly otherwise he must also be held responsible for any fraud conducted by company.
Potential liability of auditor in such global financial crisis
Any auditor who is involved in fraud conducted by company then such auditor will also be held responsible if it is proved that auditor was aware about misconduct and fraud conducted by company. Even after aware of facts auditor fails to disclose those facts as he was also involved with company. In this case preceding against auditor will also be conducted along with the respective company. For example in case of Lehman Brothers, their auditors EY were aware about all the facts of Lehman Brothers but they didn’t disclose them to its stakeholders (Ball, 2016). When bankruptcy was filed it was proved that auditor knew about all this before. In that case auditors were held responsible and preceding against EY was conducted for their participation in the fraud by Lehman Brothers.
This is applicable to all the auditors that if they fails to perform their duties which results to such frauds then auditor will also be held liable in such case. If any misconduct is done by auditor whether intentional or unintentional which results to such global financial crisis, in that case auditor will also be liable as a part of that fraud (ZACK & Zack, 2011).
Auditors are liable for all types of offences which are occurred due to mistake of them whether it is civil offence or criminal offence. Civil offence is when there is a dispute between individuals and organization. Criminal offence is when individuals or organizations breach any law or provision which is imposed by government. There are various laws that are applicable to companies for different countries and these laws includes governing of an auditor in companies and provisions relating to financial accounts of company. In that case all the companies have to follows those provisions contained in the act (Ball, 2016). If any auditor fails to do so then he can be prosecuted in court. Civil offences includes liability of auditor to clients and third parties. If an auditor conducts any such breach of his liability then he can be penalized for his such conduct. In such situations where an auditor is caught as involved in a fraud then he must be held responsible for any civil or criminal offence conducted by him.
Potential liability that an auditor has to face for involvement in any fraud includes breach of contract or tort. Breach of contract is when auditor has not followed the applicable accounting standards or he has conduct any breach of terms and conditions that are mentioned in audit contract. In these this possibility also occurs that auditor might also be directly liable when intentionally he has concealed any facts which were mandatory to disclose (Greg, et. al., 2013).
Auditors are responsible to disclose all the material facts that are related to financial position of company so that stakeholders of company get aware about true and financial position. Auditors must perform all his tasks properly. In order to avoid any kind of potential liability he must follow the below activities.
- He should firstly identify specific kind of fraud that may be involved in financial statements.
- He should assess all identified frauds so that those frauds can be assessed and auditor can fulfill his duty properly.
- He must report to management, stakeholders and other appropriate authorities regarding fraud.
Abovementioned must be actual work of an auditor which he must do while conducting an audit. This will help him to conduct audit without any risk and any liability.
Global financial crisis resulted to various strict laws for auditors that now it is obligatory for auditors to fulfill their duties properly in order to avoid any litigation and prosecution. Global financial crisis had a great impact on global economy and so it was concluded that it would not have been possible if auditors of Lehman Brothers who were auditors of EY would have disclosed the relevant facts to stakeholders of Lehman Brothers. In that case auditors were involved in fraud of Lehman Brothers (Greg, et. al., 2013). After this various provisions were made to improve the quality of working of auditors so that they should fulfill their duty properly. They should not involve themselves in any such fraud work. If any auditor fails to perform his duties which results to any such scandal or after global financial crisis any such activity of an auditor may lead to litigation, proceedings and penalties against auditors.
This ACC707 Auditing Assurance and Services Assignment has concluded the major role of auditor in any company and also their true and fair work contributes to the growth of economy. This also helps in saving the economy from any global financial crisis like in the case of Lehman Brothers. In that case if auditors have fulfill their duty properly and EY would have done accounting of Lehman Brother properly then this situation would not have occurred. This report has also concluded the importance of provisions of accounting and policies. Auditor must ensure the fulfillment of accounting policies in financial statements and so he should fulfill all his other duties related to accounting in a company. This will result in betterment of stakeholders of company that they will get to know about true and fair view of financial position of the company. This will also help in saving auditors from any kind of liability including litigation, prosecution and penal provisions.
Auditors must understand their duties and responsibilities properly that they must provide quality of work. They should not get themselves involve in any kind of fraud which is conducted by company. If auditor identifies any kind of fraud that is conducted by company, he should report that fraud to the relevant stakeholders. Through this he is able to fulfill his duties properly. For conducting proper audit there must be proper coordination and communication among the external auditors and internal auditors of company. External auditor must conduct audit on the basis of all the necessary documents provided by company. He must also enquire about documents that are relevant but are not provided by company. He must ensure his quality of work. He should complete his audit ethically. He should also follow good professionalism. An auditor must be responsible for doing all the activities that are related to financial statements of company. In this case he must ensure the relevancy of financial statements. He must ensure that financial statements of company are prepared with keeping in view the generally accepted accounting principles that are applicable to companies.
Ball, L., 2016, “THE FED AND LEHMAN BROTHERS”, Johns Hopkins University, pp 1-214.
Bris, A., 2010, “THE LEHMAN BROTHERS CASE” A corporate governance failure, not a failure of financial markets, pp 1-7.
Burkhanov, 2011, "The Big Failure: Lehman Brothers’ Effects On Global Markets", European Journal of Business and Economics, vol 2. pp 1-5.
Chadha P, 2016, “What Caused the Failure of Lehman Brothers? Could it have been Prevented? How? Recommendations for" Going Forward”, International Journal of Accounting Research, pp 1-5.
Greg, F., Wilks, T., and Zimbelman, M., 2013, “How Auditor Legal Liability Influences the Detection and Frequency of Fraudulent Financial Reporting”, Current Issues in Auditing, volume 7, issue 2, pp 9-15.
Gyamf, M., 2016, “The Bankruptcy of Lehman Brothers: Causes, Effects and Lessons Learnt”, Journal of Insurance and Financial Management, vol. 1, issue 4, pp 132-149.