Discuss about the Auditing Assurance and Services for Global Financial Crisis.
Audit refers to the check and verification of the accounts and records of the organisations. The given case is based on the auditor’s liability. According to the given scenario, the auditors may face some problems due to the global financial crisis and this has to be reported so that the partner in the firm, Sally smith get to know about the case. This report discusses the case of the collapse of Lehman Brothers which led to the global crisis in the world. This financial crisis created a big challenge for the auditors because people trust on the financial accounts. When the financial accounts are not correct and fair, the people will not be able to trust the actual presentation of the company’s accounts checked by the auditors. Working as a partner in a chartered accounting firm, I am required to prepare a report to inform and update the partner Sally that what are the liabilities which have to be borne by auditors because of the financial crisis in the world.
Global financial crisis
A global financial crisis is the business environment in which it becomes difficult to succeed for the business. It is the economic disaster in which the demand and sales of the goods and services reduces. This happened in the year 2008 globally because the banks created so much of money in a lesser time which led to the speculations in the financial markets and debt in the economy (Ciro, 2016).
The above graph clearly shows that banks doubled the amount of debt in the economy in 7 years while the cash was just £67 billion in 2014. The debt provided to population was used heavily for properties and it raised the prices of properties which was also higher than the wages. 50% of the debt was used together in property and real estate and 32% went to the financial markets and just 8% were allotted to credit cards and personal loans (Balli, et. al., 2013).
With the time the debts became unplayable because the amount of debt became more than the income of people. People stopped repaying their loans and the banks began to fall in the situation of bankruptcy.
Collapse of Lehman Brothers and the emergence of Global financial crisis
It happened on September 8 in the year 2008 when Lehman brothers declared themselves as bankrupt. This is the largest and biggest bankruptcy in the history with around $619 billion in debt and $639 billion in assets. When the bank declared itself as bankrupt, it was the fourth largest investment bank of US. It had 25000 employees at that time. The downfall of Lehman Brothers led to the financial crisis in the world. The equity markets of the world also collapsed with the loss of around $10 trillion. Debt markets are like the backbone of the economy which fell and the economy collapsed (Appelbaum, et. al., 2012).
It is believed that Ernst & Young which was appointed as the auditors of Lehman brothers window dressed the accounts. They were paid the sum of $31 million for the audit of the organisation. When an audit team conducts an audit at a big bank, it needs to have and experiences partner from one of the big four accountancy firms which are KPMG, Ernst &Young, Deloitte or PWC. The rest of the teams can be made up of junior accountants and trainees and they are required to check and verify all the books of accounts of the bank according to the accounting rules. They also have to maintain good relationships with the internal auditors so that the in-house whistle blowers can help the auditors. In case of Lehman brothers, the auditor team ignored the signs given by the internal auditors for the high liabilities of the organisation (Marshall & Herrod, 2009).
The auditors checks and verifies the books of accounts of the firm so that the investors and other stakeholders can get the “true and fair view” of the company’s books of accounts. But in the case of Lehman Brothers the auditors concealed many facts which led to the announcement of $50 billion of liabilities on the company later on. This was required to be identified by the team of auditors and the real situation of the company was required to be displayed in front of the stakeholders and the world. When Lehman brothers declared themselves as insolvent, it was revealed that the company was not using correct accounting methods and procedures (Radonjic & Zec, 2010). They just try to portray better condition of the company and the reality was something else. It was also discovered that Ernst & Young knew about these unfair accounting procedures adopted by the company but it kept mum because it was paid $150 million for showing the financial statements of the company in a good condition. The investors of Lehman Brothers sued Ernst and Young for their loss and in return EY paid $99 million to settle down or close the case to them in the year 2013. The audit company still denies its involvement in the crisis and the unfair representation of the books of accounts of the firm. The audit firm states that this crisis is because it has done high leveraging. It is not because of accounts and accounting activities (Sikka, 2009).
Auditors are required to fulfil their duty, check and verify the accounts, vouch them and make sure that the company is following all the necessary requirements and its books of accounts are true and fair The financial crisis is mainly because of western countries and the global financial crisis of 2008 brought issues on the practices of accounting and auditing as well. The external auditors appointed by the company re for increasing the credibility and integrity of financial accounts but not for concealing the facts, misrepresenting the data taking high amount in return from the company (Valentine & Woods, 2010).
What is the liability of Auditors in the situation of global financial crisis?
Auditors are responsible in the situation of global financial crisis. The auditors are entitled to use the International Standards on Auditing failing to which they are failing to do their duties. It is because many users rely on the financial statements for taking the primary information and they consider those financial statements as True and fair because they are audited by the auditors. According to ISA 200 the main objective of audit governance is to make an auditor enable to express an opinion on the preparation of financial statements. All the audit procedures should be taken into account and according to the professional standards by the auditors. The auditors are liable to check and verify each and everything they are responsible to and should present their True and fair view on them. After completing the audit, the audit report is prepared, signed and then finally send to the owners/ shareholders of the company (Flores, 2011).
Auditors are blamed when they do not justice with the end users of the financial statements. The auditors are required to plan, perform and follow the procedures to represent the true and fair view of the accounts. The silence and negligence of auditors in case of any fraud or misrepresentation of facts is considered against the duties and ethics of auditors. In that case, the auditors are accused of seeking their own interest. The loopholes in audit occur due to lack in effective communication between the internal auditors and external auditors (Chen, et. al., 2016).
What is the potential liability of auditors due to the results of Global financial crisis?
The case of auditors and their silence on the clear situation of the financial statements of Lehman Brothers highlighted the roles played by the auditors and raised many questions. Auditors are not responsible for the sensible decisions taken by the businesses or for the downfall of the business but they are required to investigate properly and represent a True and Fair view of the books of accounts of the company. The companies generally rely on the auditors to check their valuation methods (Omarova, 2009).
The case of Lehman Brothers raised issues on the role of auditors. The auditors are required to be fair and honest while conducting and audit and while presenting an audit report. After the financial crisis, the auditors have to be more aware and effective in their work. They have to present their ideas, innovative answers to the questions raised by the companies. The auditors were criticised after the case of Lehman Brothers and Ernst & Young so they are now more responsible for producing quality work so that the end users can again trust on them. The loss which is made on the reputation and image of the auditors has to be gained again by maintaining the quality of work and by following the standards of auditing. The development of frameworks ensured the safety and integrity in the financial books of accounts after the global crisis and the audit companies are focussing on building up the strategies and solutions so that the risks to the auditors can be reduced and they can perform quality audits in the volatile market situations as well (Flores, 2011).
The auditing companies refused to accept the audits from the clients which had doubtful accounting procedures and which were risky enough. The companies tried to focus on the accounting concepts and standards of auditing so that the allegations and criticism can be reduced and the end users can develop faith on the accounts audited by the auditors. The end users expect that the auditor is the one which is neutral between the companies and the end users/ stakeholders. They just have one motive that is to check and verify the books of accounts properly and according to the standards so that they can present a “True and fair “view (Appelbaum, et. al., 2012).
It can be concluded that the auditors are responsible to provide their clear opinion on the financial statements of the companies. The case of Lehman brothers involved the suspicious activities by the auditor Ernst & Young which led to the criticism of Auditors. The assignment report includes the discussion about what is financial crisis and how it actually took place globally. The case of Lehman Brothers and its auditors is been discussed which provides details that how the facts and figures were concealed from the public and how the auditors were at fault. An auditor is responsible for the true and fair representation of books and accounts and it has to follow the internal auditing standards. The role of auditors after the crisis and how they handled the crisis well with strategies and some crucial decisions has been discussed in the report. Now auditing has become questionable after the case of Lehman brothers in which the auditors were claimed of taking a huge amount for not disclosing the real position of the company. But this needs to be solved with the help of more focus and by enhancing the quality of the procedures of auditing. The laws and rules need to be made stricter so that no such incident can ever happen again.
There are some recommendations which can help in making the audit procedures fair and clean. It is recommended that the auditors should choose the audit of the companies whose practices are not doubtful and which reduces the risk of auditors to get engaged in the regulatory procedures. The auditors should focus more on planning the whole process of auditing so that it can improve the whole process and the equality can be increased. The auditors are advised to take help of recent technologies and practices which reduces the time taken in audits and make the audits more effective. There should be effective communication between the external auditors and internal management of the companies so that any activity which the external auditors are not able to see can be effectively disclosed by the internal management. The audit fee should be decided within the limits. In case of the he corporations, joint audits can be conducted so that the chances of errors and frauds can be reduced. The auditors should be prepared to answer the questions by the shareholders and end users who increase the trust of the end users on the auditors.
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Flores, C. 2011, "New Trends in Auditor Liability", European Business Organization Law Review (EBOR), vol. 12, no. 3, pp. 415-436.
Marshall, J. & Herrod, N. 2009, "Lehman Brothers insolvency - client assets", Law and Financial Markets Review, vol. 3, no. 2, pp. 145.
Omarova, S.T. 2009, "The new crisis for the new century: some observations on the "big-picture" lessons of the global financial crisis of 2008", North Carolina Banking Institute, vol. 13, pp. 157.
Radonjic, O. & Zec, M. 2010, "Subprime crisis and instability of global financial markets", Panoeconomicus, vol. 57, no. 2, pp. 209-224.
Sikka, P. 2009, "Financial crisis and the silence of the auditors", Accounting, Organizations and Society, vol. 34, no. 6, pp. 868-873.
Valentine, T. & Woods, M. 2010, Management in focus: global financial crisis, Pearson Australia, Frenchs Forest, N.S.W.