Auditing Issues Surrounding The Collapse Of Lehman Brothers Essay.

The new auditing standard ASA701 Communicating Key Audit Matters in the Independent Auditor’s Report is developed in the wake of the global financial crisis, in particular the collapse of Lehman Brothers. This development is in response to calls from shareholders to know more about the companies they invest in. You are required to research the auditing issues surrounding the collapse of Lehman Brothers. Further you are required to relate the issues that led to the development of the new auditing standard ASA701 Communicating Key Audit Mattersin the Independent Auditor’s Report. As a result of your research, provide the key audit matters which would be required to be disclosed in the audit report to the members of Lehman Brothers if the new auditing standard ASA701 (ISA 701) had applied inthe period leading up to the collapse of Lehman Brothers.

The Collapse of the Lehman Brother and the Liability of Auditors

The study has focused on variety of issues faced by the auditors in carrying out their liabilities and responsibilities especially at the time of the global financial crisis faced by the society.  At the time and duration of the financial crisis, the auditors find it difficult to give reasonable amount of assurance about the proper preparation of the financial reports along with the exclusion of the material misstatements or errors. The outcome of the Standards of Auditing of the country gives an indication that the users have a reliance on the financial announcements of the firms, as the users are unable to meet the needs of the information (Allen and Ramanna 2013).

The major purpose and objective of the study is the examination of the influence of financial crisis and other in the company. The standards of auditing related with the communication of key audit matters have been discussed in relation with the collapse of the Lehman Brothers.

The worst financial crisis at the time of Great depression was the fall down of the American Investment Bank i.e. Lehman Brothers. The collapse of the company was the lesson for the auditors and many corporations and it stated the responsibilities of the auditors to communicate with the management and other major authorities (De Haas and Van Horen 2012). It also showed the obligations of the auditors to prepare a true and fair account that would be according to the standards and the appropriate policies of Auditing stated by different regulatory authorities such as the Australian Accounting Standards Board in the given case.

The section undertakes an analysis in detail that has a relation with the financial crisis and the objectivity and accountability of the auditors. It is necessary for every auditor to understand and comprehend the major notions regarding the financial instability of the company. In case of the Lehman Brothers, the company had faced major challenges regarding the economic, political as well as social environment. The company had faced a lot of difficult situations of various economic actions and a slowdown, stagnation and decline in the economic actions. The crisis created a state of significant decline and downgrading of the transactions in the stock exchange along with the creation of a disorderly market transitions (Eilifsen et al. 2013).

A financial crisis can be considered as an occasion to put right dissimilar aspects of the financial system. It takes into account, mainly the inadequacies that have been heading towards the slowdown or decline in the economic conditions. The international institutions and the government can conquer and prevail over the poor effects and consequences of the economic crisis by guiding the system towards the maintenance of clearness, development of regulations on accounts of securities, appropriate ruling of markets, safeguarding of integrity of financial markets for strengthening the entire collaboration between the financial conglomerates in the world.

The system regarding the finance and other transactions require an increased amount of clarity and lucidity with regard to variety of aspects surrounding an organization. The players of the financial markets have a great role in mediating in the reporting to be made. The establishment of a variety of strict and effective regulations and policies can lend a hand in the process of diminishing or removing the fluctuations at the times of worsening of the market conditions. The increase in the various instruments of finance has a complicated nature towards the role to be played for determining prices and creating a risky affair for the investors (Fontaine et al. 2013).  

Financial Crisis and the Liability of the auditors

This Auditing Standard “ASA 701” (Communicating Key Audit Matters in the Independent Auditor’s Report) deals with the obligation and the responsibility of auditors to communicate the audit matters that are of foremost importance in the report of the auditors. The standard intends to address the judgment of the auditors with regard to the nature of the dealings that needs to be communicated in the report and the contents that would form part of the communicated report. The major objective of the communication process is the enhancement of the value of the report prepared by the auditors to provide clarity about the audit performed. The communication of the matters help in providing additional amount of facts and information to the users of the financial reports for helping them in knowing and understanding the important matters related to the financial report of the present period (Holm and Zaman 2012). The communication of important matters may also help the users in additional engagements with the management and those charged with governance about the matters having a relation with the entity and the management.

The auditor has a accountability and responsibility towards issuing opinion on the financial statements of business entities and along with the audit performance, the auditor needs to undertake high responsibilities with the engagement terms of the audit as a whole. An auditor’s liability is to meet the terms of the audit engagement at the time of signing the engagement letter in which he agrees to carry out and execute the terms of the auditors. Thus, he needs to take care that the auditors carry on the mission as well as the compliance of the standards of audit (Jones and Presley 2013). The mission objectives take into account the determination of a variety of financial reports for the assessment with the structure of the reporting.   

In addition to the above, the auditor has the obligation to execute the art of professional skepticism for the identification of the nature, time and extent of the procedures of audit along with the investigation of the audit evidences and results. The same is done towards the reorganization of a report that is free from the material misstatements. The responsibility and the accountability of the auditor are to evaluate the qualitative measures applied in the financial reporting of the entity. The audit helps in maintaining the quality by the correct sign and dating the documents of working and by combing the various important segments of the profit and loss and the balance sheet (Koh et al. 2013).  

The auditor must also maintain the internal controls and take into account the detection of the risk that arises due to the errors and frauds within the entity. The error of detection helps in the determination of the wrong or misinterpreted calculations and facts related to the misapplications of the various policies and procedures of accounting. The fraud detection has a reference to the liabilities of the assessors for the recognition of the diversified areas as well as the removal of omissions of various financial transactions (Kumar and Mohan 2016). There are varieties of misapplications that occur in the environment of the entity and has relation with the strategies of accounting and that can lead to the misleading of the users of the information of the finance in the organization.

The Communication of Key Audit Matters by the auditors

The economy has a bad affect on the finances and crisis in the economies that can affect the enterprises and the budgets of the government. In the periods of the financial crisis like in the case of Lehman Brothers, the assessors must undertake various challenges to cross the hurdles and handle the unstable and uncertain scenarios that occur within the economy. The accountability and liability of the auditors are enhanced and highly augmented in the various situations that occur with the fluctuations in the economic conditions (Louwers et al. 2013).

The auditors are thus imposed with huge liabilities and responsibilities of dealing with the high risks and situations of threats. They have the obligation of dealing with difficult situations that are related to the economic environments by maintenance of continuing relationships with clients. They must also work towards communicating with the ones having an added responsibility towards the financial reporting and communications with organization (Mensah 2014). Besides this, the evaluators must consider and take into account a variety of consideration concerning the concept of going concern, figure out the business entity and its environment, forecasting the strategy of audit, audit deliberation for various financial assertion, plans of superannuation and revelation regarding the reports on the financial statements and forming of opinions by the auditors.  

The business entity, equivalent body of governance and the Board of Directors have an accountability and responsibility towards the various oversight operations related to the business entities. The responsible bodies that governs with compliance to the Listing Rule of the Australian Stock Exchange and the Regulations creates committees of Audit that helps in the foreplay of the major and critical operations towards the oversight of the reporting process of the entities. In the period of financial crisis the role and responsibility gets tougher and critical as the same involves the establishment process and procedures to be overseen. The role also has an involvement of the maintaining of a variety of internal controls that helps in the provision of reasonable amount of assurance with regard to the reliability and consistency of the financial reporting of various business organizations (Messier Jr 2016).

There has been amplification in the liability and accountability of the auditors after the occurrence of the global financial crisis. For this reason, the assessors take steps in congruence to the governing units to reconsider the risks faced by the business concerns. The step is taken to make certain that the committee of the audit members have undertaken policies that take into account the impacts or influence of the latest risks along the risks that are pre-existing for the overseeing of the financial reporting procedures. The auditors must also consider the management reconfirmations that have a regard to the reporting and the system of internal controls (Mueller et al. 2015). Hence, the assessor liability include the assurance about the operations and functions carried by the entities in a proper and effective manner for supporting he company in the most difficult times.     

The entities also face the risks of liquidity and uncertainties of material nature and hence, the auditor must consider the evaluation of the business entity in regards to the capability of maintaining the going concern. The judgments of the management must be understood that have relation with the values of the illiquid assets and in supporting a wide range of information. The enhanced liabilities of the assessors at the time of financial crisis have the requirement of obtaining the assurance from the management and administration with regard to the significant strategies of accounting and the policies and judgments (Schmidt 2012). The above liabilities need to be supported by proper analysis and integrity of the auditor to cope up with vivid circumstances and executing proper records and documentation.

Auditor’s Responsibilities

The augmentation in the liabilities and responsibilities of the auditors has necessitated the requirement of the maintenance of continuous and regular communication with the governing units of the organization. At the time of the uncertainties in the economic situations, the need for the regularity in the communication process increases for the resolving of various issues on a timely basis. Thus, the auditor has the responsibility of become more cautious and aware of the need of communication with the management and those charged with governance (Svanström 2013). The auditors can become cognizant about the weaknesses if present in the internal controls of the business or any material weaknesses in the financial statements or reports prepared by the management. By the help of effective communication, the auditors can understand the nature of the business entities, its environment and the other factors that needs to be assessed. The evaluation procedure of the auditor must be strong and effective enough, as it must assess the risks that may be concerned with the financial reports and other material misstatements owing to fraud (Tarr and Mack 2013).

The auditor is required to take into account the suitability and aptness of the employment of various suppositions of going concern during the course of preparation of a variety of financial announcements. In addition, the auditor must consider the material and substantial suspicions connected to the ability of the business unit to go on with the idea of going concern. Yet again, in unsure circumstances like the global financial emergency, there is condensed accessibility of credit along with the illiquidity throughout the short-range period (Wiggins et al. 2014). Further, the same can point towards a wide range of prospective problems that is capable of influencing the procedure of continuation or persistence of the business entities going concern.

The global financial crisis has presented and stated the necessity for the implementation of a policy or strategy for the report of the financial audit. The accountability of the assessor consists of the progression and modifications in a variety of information apart from those accessible all the way through the procedure of audit (William Jr et al. 2016). The policy on the whole points out at the various classes and allotment of possessions that has the ability of getting exploited for specific zones of audit, occasion of different events concerned with audit and materiality. The auditor also takes into account the measurement of fair value, computation on impairment of assets, writing down of the tax assets, superannuation fund enumeration, lawful issues concerning contracts and conventions, factors of fraud risks and subjects disturbing the ability of the business entity to continue as a going concern (Ye and Simunic 2013).

The auditor has the accountability of understanding the business entity in a proper way along with the surroundings of the operations of the business entity. The auditors has the need of concentrating on particular regions of financial reporting for discovery of the material misstatements. The inspector also has the requirement of having extraordinary contemplation for various areas of financial reporting. The areas include the adjustments in accounting, impairments of dissimilar traced worth of the asset, modifications in the share capital and arrangements of debts (Zadek et al. 2013).

As per the Auditing Standard ASA 230 i.e. “Audit Documentation”, the auditor has the responsibility to uphold records that can create a certainty about the records of the auditor and his performances for supporting the conclusions.

From the above discussions and analysis, it can be concluded that the auditor need to plan and create policies and strategies that can help in the gathering of the proofs and evidences. The evidences can help in maintaining a variety of financial declarations and assertions made by the management and the entity on a whole to check the materiality and going concern scenario. In case of Lehman brothers, if the company would have maintained the documentations and continued effective communication, the company would have not faced such a huge collapse. The auditors to generate the evidences must maintain the professional skepticism. The principles of accounting are obligatory and prescriptive in nature and character. The Auditors are thought and anticipated to be free from the clients in facts and appearances. A higher prejudiced way of thinking needs to be implemented towards reaching a conclusion about whether the standard can be reached in a particular situation. The examiners as a result have to be objective in the manner the assessors require to observe the evidences of audit.

References

Allen, A. and Ramanna, K., 2013. Towards an understanding of the role of standard setters in standard setting. Journal of Accounting and Economics,55(1), pp.66-90.

De Haas, R. and Van Horen, N., 2012. International shock transmission after the Lehman Brothers collapse: Evidence from syndicated lending. The American Economic Review, 102(3), pp.231-237.

Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance services. McGraw-Hill.

Fontaine, R., Letaifa, S.B. and Herda, D., 2013. An interview study to understand the reasons clients change audit firms and the client's perceived value of the audit service. Current Issues in Auditing, 7(1), pp.A1-A14.

Holm, C. and Zaman, M., 2012, March. Regulating audit quality: Restoring trust and legitimacy. In Accounting Forum (Vol. 36, No. 1, pp. 51-61). Elsevier.

Jones, B. and Presley, T., 2012. Law and accounting: did Lehman Brothers use of repo 105 transactions violate accounting and legal rules?. Journal of Legal, Ethical and Regulatory Issues, 16(2), p.55.

Jones, B. and Presley, T., 2013. Law and accounting: did Lehman Brothers use of repo 105 transactions violate accounting and legal rules?. Journal of Legal, Ethical and Regulatory Issues, 16(2), p.55.

Koh, K., Rajgopal, S. and Srinivasan, S., 2013. Non-audit services and financial reporting quality: evidence from 1978 to 1980. Review of Accounting Studies, 18(1), pp.1-33.

Kumar, E.P. and Mohan, B., 2016. Origin And Development of Auditing.PARIPEX-Indian Journal of Research, 4(9).

Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2013. Auditing and assurance services. New York, NY: McGraw-Hill/Irwin.

Mensah, J.M.K., 2014. The Failure of Lehman Brothers: Causes, Preventive Measures and Recommendations. Research Journal of Finance and Accounting, 5(4).

Messier Jr, W., 2016. Auditing & assurance services: A systematic approach. McGraw-Hill Higher Education.

Mueller, F., Carter, C. and Whittle, A., 2015. Can audit (still) be trusted?.Organization Studies, p.0170840615585336.

Schmidt, J.J., 2012. Perceived auditor independence and audit litigation: The role of nonaudit services fees. The Accounting Review, 87(3), pp.1033-1065.

Svanström, T., 2013. Non-audit services and audit quality: evidence from private firms. European Accounting Review, 22(2), pp.337-366.

Tarr, J.A. and Mack, J., 2013. Auditor obligations in an evolving legal landscape. Accounting, Auditing & Accountability Journal, 26(6), pp.1009-1026.

Wiggins, R.Z., Piontek, T. and Metrick, A., 2014. The Lehman Brothers Bankruptcy A: Overview. Yale Program on Financial Stability Case Study.

William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and Assurance Services: A Systematic Approach. Auditing and Assurance Services: A Systematic Approach.

Ye, M. and Simunic, D.A., 2013. The economics of setting auditing standards. Contemporary Accounting Research, 30(3), pp.1191-1215.

Zadek, S., Evans, R. and Pruzan, P., 2013. Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.