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Auditing Assurance and Individual Paper Editing Services
This report is based on the effectiveness of any organisation and its effectiveness based on the efficient services provided by the auditors. Auditors are key persons in any organisation and are liable for any misconduct in the financial aspects of the company or any business. This report defines the role and importance of auditing and assurance services provided by auditors in any business or organisation to manage transparency and ensure their liability or responsibility in case of any collapse or uncertainty. In the present business environment Auditors are liable for the consequences of any crisis and are expected to protect the global market from breaking and collapsing. This project report is analysis of the role and liabilities of auditors in case of any global crisis which took place in case there are ineffective services are provided by them. Global crisis which arises in 2008 due to the breakdown of Lehman Brothers which was the fourth largest bank of America and declared as bankrupt in 2008 which was due to ineffective auditing and assurance services provided by auditors. As in the risk which was exiting in the company was measured inappropriately by auditors of the company and this leads to the collapse of the bank and this resulted as failure of different financial market all around the globe.
In this report a case study is analysed with taking references of case study of global financial crisis due to collapse of Lehman brothers which is due to ineffective risk management by its auditors. A Chartered Accountant Firm in which Sally Smith is a partner there is a proposal which is for the analyses of potential liabilities of auditors in case there is a collapse which is leading to global financial crisis and breaking down financial markets of different countries. Lehman brothers one of the largest banks of America and financial markets of different countries was depending on it in different manner (Quax, et. Al 2013). This report will show and explain different aspects of case of Lehman Brothers and on that basis we will discuss the liabilities and role of auditors in the situation of collapse and global financial crisis.
Reasons of global financial crisis
Global financial crisis arises due to collapse of various economies around the globe. Global financial crisis arises when there comes imbalance between the financial market and population and risk factors which are ignored make their negative impact. Lehman Brothers which was 4th largest bank of America and declared itself as bankrupt emerges as the main reason of financial crisis. Following are some reasons which can lead to global financial crisis (Oldani, et. Al 2016).
1. The Securities and Exchange Commission and the Financial Accounting Standards Board started to value assets of public company on the market value and this tends to reasons for the insolvency of banks due to making it difficult to value assets.
2. Inappropriate ratings are provided to securities by the three rating agencies Standard & Poor's, Fitch, and Moody's. This leads to conflicts in the interest as in there are paid huge amount to the agencies by the issuers in the market.
3. Securitisation of loans is proved as the main reason of this global financial crisis. As in most of the loans are retained with the banks and there are different sub mortgage of securities. The default risk was very less.
4. Different financial instruments which are developed against the loan defaults and this leads to exchanging the risk with the counter party risk and create un-coverable liabilities.
5. Companies started to not include the assets with high risk in their balance sheet and this increases the off balance sheet risk in the companies which can lead to collapse.
6. The bankruptcy of Lehman brothers can be treated as the epic mistake which emerges the problem of global financial crisis. His was a money centric bank which is commercial and investment bank from nature and started other economies to fall due to its collapse (Valentine, et. Al 2010).
Auditor’s role in organisational effectiveness
In the present business environment there is required effective level of compliance and fulfilment of regulations due to compete with the complexity and diversity. There are emerges multiple regulations which are to be followed and apply by every organisation to ensure effective and efficient running of business. Environment sustainability, human capital, corporate social responsibility, legal matter management, competitive practices, whistleblowing, hiring and retention, workplace violence, employment and labour, information management, government contracts, and control of malpractices such as money laundering, fraud, and corruption are some examples of these regulations. Auditor is the key person who ensures and evaluate that all these regulations and governance activities are conducted efficiently in the organisation. Auditor identify the organisational business model and analyse its objectives, problems and risk factors which can be arise and can emerge the organisation’s growth and can lead it to failure and collapse. Governance, Risk, and Compliance (GRC) programs are governed in organisations to achieve high level performance and growth (Liao, et. Al 2015.
Auditors are liable to assess the risk which is carried by a business in its activities and must be effectively managed by prioritised the high risk areas. In case of inappropriate assessment and distribution of risk heavy loss can be bear by the company so it is liability of auditor to identify overall risk in the business. Auditor should provide clear and accurate accounting by following all the required financial accounting standards which are provided by the Association of Chartered Certified Accountants (ACCA). Auditor should adopt and comply the right and most suitable approach of auditing by analysing the needs and requirements of the organization and this can be effectively done by making effective audit plan for the overall process of audit which can be altered and updated in accordance with the requirement. So we can sate that auditors plays significant and immense role in appropriate running of any business or organization and liable for all the above aspects (Liao, et. Al 2015).
Lehman Brothers Case Study
Lehman was fourth largest investment bank which was having more than 25000 employees all around the globe and declared itself as bankrupt in 2008 due to its malfunctioned activities and ineffective and inefficient auditing process. Lehman acquired five mortgage lenders with the US housing boom in 2003-2004. Subprime lenders are also included in that and huge level of revenue was earned by the company and this lead the capital market with a growth rate of 56%. Lehman was engaged in the repos which is a repurchasing agreement of company’s shares on collateral basis. These collateral securities were treated as sales of the company in place of mortgaged securities. This leads to increased assets and decreased liabilities of the company. According to US accounting standards there is a need to report the substance which means to showcase the actual and real situation. But the management of the company tried to convince the auditors of company to treat these repurchase agreements as the sales of the company with over-collateralized 105% in the case of those backed by debt instruments and 108% for those secured by equities to reduce the debt of the company which will define the company as economically strong and beneficial and able to attract investors in the company. Lehman show itself as less leveraged and risky by reducing its debt equity ratio. This helps in making the company capable for taking more borrowings (Lehman Brothers' Collapse 2010). The stock of the company started falling rapidly with the failure of two Bear Stearns hedge funds which was the start of Lehman’s collapse. The high degree leverage of the company started falling due to failure of second largest underwriter of mortgaged backed securities and there started questions about the mortgage portfolio of Lehman. Lehman was having huge part of credit default swaps which is the counter party risk in the company’s debt and it is becoming a problem for the company as in the hedge fund clients started pull back their funds from the company. Moody’s the credit rating agency of America redefined the credit rating of the company which was inappropriate and increased market value of the company’s shares. Barclays PLC and Bank of America Corp. (BAC) tried to takeover Lehman which was the unsuccessful. And in 2008 the company has to declare itself as bankrupt as in there are inadequate resources for the repayment of the loans for the mortgages of the company.
There are various defaults made by the auditors of the company which leaded the company in the direction of failure. The following are some causes-
1. The management of company convince its auditors to misrepresent the transactions of company. As in the repos repurchase agreement which is made by the company by mortgaging its securities on collateral are showed as sales of the company to reduce its debts and increase its assets. This was overruling the US accounting standard which defines that there should be substance reporting of the situations (Lehman Brothers' Collapse 2010).
2. In this case there is a situation of increased off balance sheet risk. As in the auditors of company overvalued the collateral securities to reduce the debt of the company and increase its assets to make it capable of taking more loans and credits. This was done by the auditors beyond their professionalism and duties.
3. The Credit rating agency also works as auditors and analyse all the aspects of a company’s financial position and appropriate governance. Moody’s which is credit rating agency of US gives inappropriate rating to Lehman which provides short term benefits in initial but was a reason for failure of Lehman.
Potential Liabilities of Auditors under Global Financial Crisis
Global financial crisis is a situation where all the economies and financial markets start falling and create a situation of recession and great financial depression. Management of the company is liable for appropriate corporate governance of regulations in the company. Auditors are the key people in the company’s effective governance. Auditors are responsible for creating transparency in the organisational activities by adopting different audit programs like Governance, Risk, and Compliance (GRC) which is effective tool and method for achieving the organisation’s compliance goals which is a recommended model of Open Compliance and Ethics Group (OCEG) it helps in making this governance and regulations as a part of organisational culture. Just like accounting standards there are also provided auditing standards which should be adopted and followed by auditors in company to achieve effective and appropriate results in the company (Flores, 2011). In the process of organisational effectiveness auditors are important and should adopt different auditing standards in its activities such as use of professionalism and professional standards. Skepticism is the feature and characteristic which must be there in the Auditor as in it provides the ability to analyse things and their reasons and also provides ability to configure things and facts which are important to be considered while executing audit process.
Professional behaviour of auditors must consider that there should be maintained quality in their services which are provided to ensure the effective and financial soundness of the company. It is important to provide true and actual position of the company in front of the general public and stakeholder of the company as in their investment decisions are influenced by the auditing report which is provided by the auditor to the company. In case of any fake representation there can emerge problem of failure of any company or business in the long run. Auditors are responsible for representing any fraud and misconception in the company to the managers of the company and should urge them to modify and change those activities as in they can harm the business in long run. In case the managers are willingly doing these misrepresentations in the financial statements of the company then in that case auditor should leave the audit process due to protect its professional standards and morality (Flores, 2011). Auditor is liable to effectively and appropriately analyse all the activities and financial statements of the company to assess the available risk in the company which can become hurdle in the achievement of organisational goals and provide more stability and certainty in the company and its activities. Auditor’s ratings are also important for the market positioning of the company and is treated as basis for investment decisions by investors hence there should be provided appropriate ratings by auditors which can also be credit rating agencies. Auditor should be also liable in case of any failure and collapse in any business due to ineffective financial management and auditing procedure.
This project report is based on the role of auditor and auditing process plays in the effectiveness of the company and its financial position. In the present business environment there are required various compliances and governance which can make organisational activities more effective and beneficial and can lead the company in the way to achieve the organisational goals. Auditors are responsible and have to fulfil different liabilities which can ensure the transparency and legality in the activities of the company by considering related auditing standards provided by Association of Chartered Certified Accountants (ACCA) to maintain university in the auditing process and to make it easily understandable. We have discussed various reasons which can lead to global financial crisis like inappropriate credit ratings by credit rating agencies, securitization of loans, ineffective representations of assets, high off balance sheet risk in the company. There is also discussed case study of Lehman Brothers and their collapse due to ineffective audit process and management in the organisation (Haas, et. Al 2012). False representation of financial transactions in the company to take advantage of increased market price of shares and increased ability to take further loans. The general and potential liability of auditors which is important to be fulfilled for the effectiveness of the organisation and business is defined in this report. And now we can conclude that there are various liabilities of auditor which are important to be fulfilled to ensure effective running of organisation.
Auditors are important aspect in every organisation as in they evaluate various financial aspect of any business by analysing financial statements and all other financial transactions of the company. To improve their role and quality of services the following are some recommendations like there should be increase in the flexibility to remove the clients which are doing their business activities with high risk and making it possible for auditors to provide more liquidity. There should be proper planning is done before conducting the audit process by auditor. There should be developed different technologies and innovative practices which can help in improving the quality of audit and provide convenience in the audit process that can help in this flexible and dynamic environment. There must be establish effective communication between internal and external environment by which appropriate representation can be made of financial activities and provide them more accessibility by making positive relationship between the auditors and clients. There should be conducted joint audits in which there are two or more auditors are involved in the company and this helps in increasing the transparency and reduces chances of any misrepresentation of financial transactions as in there are involved more than one auditor and faith of all are important in the auditing process (Quax, et. Al 2013).
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Quax, R., Kandhai, D. & Sloot, P.M.A. 2013, "Information dissipation as an early-warning signal for the Lehman Brothers collapse in financial time series", Scientific Reports, vol. 3, pp. 1898.
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