Audit and Assuranace Global Financial Crises

Question: Discuss about the Audit and Assuranace Global Financial Crises. Answer: Introduction In this report, discussion on the global financial crises has been undertaken so as to aware one of the partner of Chartered Accountants firm i.e. Sally Smith. In every accounting scandal or financial crises situation Chartered Accountants or auditors had some role to play. Financial crises are the situation under which debt of business organisation becomes unrecoverable from estate of business organisation. In this report, discussion of Lehman Brothers accounting scandal that had brought financial crises globally has been discussed. What part those auditors of Lehman Brothers i.e. Earnest Young had played has been analysed and discussed. What are possible or potential liabilities that auditors of such business organisation shall possess were discussed in this report. This report has layers in terms of analysing potential liabilities of auditors because of financial crises that had taken place because of global financial crises. Discussion area of this report is Lehman Brothers scan dal, roles of auditors in that scandal and what are different potential liabilities that auditors shall possess because of these accounting scandals were analyse (Jinh Chang, 2012). Body Context Financial crises can be defined as the situation under which demand for funds is much higher than its availability or its supply. In this situation financial cost of debt funds or equity funds raises high and this will slowly evaporate available funds with the business organisation. Financial crises is the situation under which liquidity in the business organisation will get negatively impacted and investors are egger to pullback their investments from business entity (Lopatta and Kaspereit, 2014). When big firm get liquidated and faces financial crises that impacts global financial market and global equity market as a whole. Then this situation is defined as global financial crises. Global financial crises can be witnessed from the collapse or liquidation of Lehman Brothers in the United States. Many experts has defined that main point that triggers financial crises is the point when assets or resources of the nation is overvalued and traded at overvalued prise (Appelbaum et al., 20 12). When price of resources start to decline and when it reaches to its actual price then situation of financial crises starts. Global financial crises (Case background) Lehman Brother has started business operations as investment bank in the United States. With the new policy regime in United States related to housing and real estate has boomed the economy. Economy of United States was enjoyed booming period in terms of high purchasing power with individuals and low debt rate in financial market. It has started when housing prises reached to sky because of United States policy that support housing for everyone (McDonald and Miller Hillis, 2016). During the booming period, many individuals have purchased houses and properties because of low housing rates. But after some time, as real estate sector starts to boom, housing prices has reached to great level. In what of higher sales revenue and higher capacity to raise more funds, Lehman Brothers has frogged its financial statements (Burkhanov, 2011). They had shown loans and debt as secured loan against house property of individuals that are mortgaged with bank. Therefore they are able to reflect these debt or loans in the sales revenue and this has ultimately raised profitability of Lehman Brothers (Norgren, 2010). After some time Lehman Brothers become leading lender of debt or as reported highest sales revenue. On the basis of higher profitability, Lehman Brothers is able to procure more debt from debt market. Investment from different investors also been increased in business operations of Lehman Brothers and they had become highly financial leveraged banking company. After some time, speculation activities has started in the real estate sector in United States and this has lead to decline side of property value. After some time, prices of overvalued assets or properties / housing sector has start decline. Likewise sales revenue starts declining and same has affected profitability of the Lehman Brothers (Ciro, 2016). Lehman Brothers has obtained funds from debt market and equity market therefore they had to repay funds. Lehman Brothers are not able to repay their debt and equity investment or returns. After decline in the real estate sector, many customers or borrowers of Lehman Brothers has defaulted in repaying their debt and defaulted. This has created liquidation issue in business operations of Lehman Brothers and started defaulting at more phase. During the issue of liquidation in the business operations of Lehman Brothers their debt has been increased and their asset value is less (Ex-Lehman Brothers boss breaks silence on global financial crisis, 2015). At that point of time, Lehman Brothers has $ 639 billion debt and $ 319 billion as assets. Therefore Lehman Brothers has suffered losses in terms of their liquid asset availability (Walker, 2010). Roles that auditors play in global financial crises Financial statement includes statements that reflect financial position and financial performance of the business organisation during the reporting period. There are mainly three types of financial statements i.e. balance sheet, income statement and cash flow statement. In case of accounting scandals, auditors plays vital role in the same. Auditing is the process of systematic analysis of financial statements of the business organisation. Audit process includes checking, verifying and vouching of books of accounts (Lu et al., 2015). This has proved to be most important aspect of auditing and auditors can understand and detect misrepresentation or forge in the financial statements. In case of accounting scandals or any other sandals has occurred because of negligence or involvement of auditors. During the period of liquidation of Lehman Brothers, Earnest Young is the external auditor which has found guilty of negligence (Bigus, 2016). Auditors have to act in best interest of stakeholders and mainly towards investors of the business organisation. Auditor shall implement professional scepticism while conducting audit procedures so as to ensure themselves about the correctness of the financial statements. In case of Lehman Brothers collapse, auditors have not applied professional scepticism while conducting audit and therefore are not able to detect flaws in financial statements. On the other hand, auditors are involved in fraudulent activities and making accounting fraud in the Lehman Brothers. Since responsibility of auditors is to analyse business situation or business operations of the business organisation or client. Stakeholders or proposed stakeholders of the business organisation rely on audited financial statements of the business organisation. Before taking any decision related to investment in the business organisation, audited financial statements are analysed. In case of Lehman Brothers case, Earnest Young has played important role in supporting financial crises in business operations of Lehman Brothers (Bigus, 2011). In most of the cases, auditors plays important role in supporting such scandals by neglecting or suppressing accounting frauds and because of their inability to detect fraud in financial statements. Role of auditor while auditing is to analyse and evaluate real business situation or condition of the business organisation. Another role of auditor in Lehman Brothers case is to check each and every of aspect of business operations (Schelluch and Gay, 2006). Since it has been analysed that, Lehman Brothers has misrepresented loan or debt obtained as sales revenues and Earnest Young (external auditor) is not able to detect the same. After some period of time, Earnest Young has proved to be guilty of negligence or guilty of professional misconduct. Therefore it can be concluded that auditors had played important role in supporting accounting scandals (Holm and Laursen, 2007). Potential liabilities of auditors in global financial crises The case of Lehman Brothers throws light on many issues which were proved as the main reason for the Global financial crisis. One of the major reasons behind the Global financial crisis is the breach of duties by the Auditors. An auditor is required to follow certain functions while performing his duties. These functions include checking and verifying the financial statements, taking care of the internal controls, taking care of the investors of the organisation and fulfilling the operations for which they are appointed. The auditors are required to check all the financial statements and books of accounts and then analyse the actual position of the business (Sikka, 2009). Lehman brothers adopted such accounting measures which displayed their better position in the market, which was actually not that good. It is found that Lehman brothers were in such a terrible condition that it was not possible for them to survive in the market but still auditors Ernst Young concealed these facts. The communication between the internal and external auditors was not good which lead to such disastrous situation of the bankruptcy of the organisation. Ernst Young was responsible for disclosing the fair and honest view on the financial statements of the company (Holm et al., 2012). The auditors are liable for following situations: Breach of contract Providing wrong opinions on audit When audit standards are not followed (Pal, 2010). The auditors have different liabilities like civil liability and criminal liability. These abilities are exercised when following situations takes place: When auditor does not take proper care in the audit of the company When the investors face loss because of the auditors breach of duties When an auditor gets engaged in the fraudulent activities with intention. When auditor has misrepresented the financial statements of the business In case of Lehman Brothers collapse, Earnest Young had concealed some facts that are material for the stakeholders to use in their decision making process. In both cases, i.e. whether deliberate or undeliberate act of Earnest Young (auditor) has failed to detect the same shortcomings in financial statements, Earnest Young has some liabilities towards different stakeholders. As stated above, there are two types of liabilities that auditors has on the basis of loss and nature of fraud conducted. After the collapse Lehman Brothers and involvement of auditor in such fraud has put auditors in answerable state to many stakeholders. Liabilities of auditors are not limited to investors of the business organisation but there it has been extended towards creditors of the business organisation, government or regulatory bodies and public at large. After the collapse of Lehman Brothers, auditors are exposed to customers and public. There are some conditions that are to be fulfilled in order to make auditors liable for the professional misconduct or involvement in fraudulent activities. Following are some conditions that are to be fulfilled: There is loss to the investors or stakeholder in the whole transaction Financial statements includes some material misstatement or financial statements are misrepresented Last condition is that, investors or other stakeholders had relayed on audited financial statements and have taken decision on the basis of information as reflected by financial statements. Auditors are expected to disclose any fraud or wrong methods followed in the companies they audit. But Ernst Young did not disclose any of the facts which led to the downfall of Lehman brothers which ultimately brought a global financial crisis. In some of the cases, the auditors do not disclose fraudulent activities carried on in the company and this is the case where the auditor is held liable for breaching their professional principles (Pal, 2010). Limited liability partnerships are beginning to form after the case of Collapse of Lehman brothers. Here two auditors are involved in the audit activities of the bigger companies which reduce the chances of fraud. The International Auditing Standards are required to be followed by the auditors in order to be true and fair (Solaiman, 2006). As per the study conducted in Australia, auditors have higher risk and pressure now while conducting audits. They also have the fear of the loss of goodwill. The collapse of Lehman brothers and the global financial crisis is a lesson for the audit firms. After the incident, the audit firms make strategies and try to avoid the audits of those companies which have doubtful financial transactions and books of accounts. Auditors have become more responsible for presenting their true and fair opinion on the books of accounts of the firms (Xu, et al., 2013). Conclusion It can be concluded that point of incidence of global financial crises is the point where Lehman Brothers declared themselves as insolvent. Insolvency of Lehman Brothers has crashed stock market globally and both equity market and debt market had falls. Introduction of governments housing policy in United States had raised property prices in United States. This had provided people an advantage to take more debt by mortgaging property whose value in recent time had declined. On the other hand, Lehman Brothers had converted loan or debt given to people as its sales revenue and has been taking funds from equity and debt market. By frogging or misrepresenting their financial statements, Lehman Brothers had obtained huge debt. When property prices fallen down, then Lehman Brothers faces real problem of defaulting customers. At that period of time, Earnest Young is the auditor of Lehman Brothers is not able to detect such fraud conducted. Therefore this has raised questions on auditors al so that because of their negligence of duty investors have face default issue. Therefore it has provided base for setting potential liabilities on auditors. It can be concluded that there are two types of liabilities of auditor that has emerged after the emergence of Lehman Brothers case. Civil liabilities and criminal liabilities are two liabilities that auditor can face as a result of Lehman Brothers case. Recommendation This is to ensure that the report presented above is free from any material misstatement and the data provided in the report are to the best of the information provided to the auditors and the same can be relied upon. A few points that are to be focused upon and should be considered for recommendation are as under: The auditors should keep in mind the independency that which means that the observations which are given by them should not be influenced because of any benefit that might be received. There should be no benefit involved in the business organisation. The agreement which is binding on both the parties i.e. the auditor and the business organisation should be properly drafted keeping in mind the proper terms and conditions that are required for a proper audit. The same should be read and understood in the same way by both the parties. Development and maintenance of audit committee shall be followed on mandatory basis for each and every business organisation. Roles and responsibilities of audit committee shall be defined and followed by business organisation. Another recommendation for the business organisation is to perform audit on joint basis i.e. joint audit shall be promoted. Joint audit for audit purpose shall be promoted as in case of joint audit, audits are required to confirm at single conclusion, and then only audit opinion will be given. Internal auditing functions shall be more accurate and shall be conducted on more detailed manner. Internal control system of business organisation shall be thoroughly checked by auditor and there shall be separate section in the audit report for comments on the same (Simpson et al., 2016). References Appelbaum, S.H., Keller, S., Alvarez, H. Bdard, C. 2012, "Organizational crisis: lessons from Lehman Brothers and Paulson Company",International Journal of Commerce and Management,vol. 22, no. 4, pp. 286-305. Bigus, J. 2011, "Auditors liability with overcompensation and reputation losses", OR Spectrum, vol. 33, no. 2, pp. 287-307. Bigus, J. 2016, "Optimism and auditor liability", Accounting and Business Research, vol. 46, no. 6, pp. 577-600. Burkhanov, U. 2011, "The Big Failure: Lehman Brothers Effects On Global Markets",European Journal of Business and Economics,vol. 2. Ciro, T. 2016;2012;, The Global Financial Crisis: Triggers, Responses and Aftermath, Routledge Ltd. Ex-Lehman Brothers boss breaks silence on global financial crisis, 2015, , News Limited, Southport, Qld. Holm, C. Laursen, P.B. 2007, "Risk and Control Developments in Corporate Governance: changing the role of the external auditor?", Corporate Governance: An International Review, vol. 15, no. 2, pp. 322-333. Holm, C., Langsted, L.B. Seehausen, J. 2012, "Establishing Proactive Auditor Responsibilities in Relation to Fraud: The Role of the Courts and Professional Bodies in Denmark", International Journal of Auditing, vol. 16, no. 1, pp. 79. Jinh Chang, H. 2012, "The updated criteria for global investment after the collapse of Lehman Brothers",AFRICAN JOURNAL OF BUSINESS MANAGEMENT,vol. 6, no. 35, pp. 9841. Lopatta, K. Kaspereit, T. 2014, "The World Capital Markets' Perception of Sustainability and the Impact of the Financial Crisis",Journal of Business Ethics,vol. 122, no. 3, pp. 475. Lu, Y., Mitchell, F. Pong, C. 2015, "Capital verification and auditor liability: evidence from China", Managerial Auditing Journal, vol. 30, no. 6/7, pp. 657-680. McDonald, O. Miller Hillis , J. 2016,Lehman Brothers,Manchester University Press, S.l. Norgren, C., 2010, The Causes of the Global Financial Crisis and Their Implications for Supreme Audit Institutions, Riksrevisionen. Pal, T. (2010). THE IMPACT OF THE ECONOMIC CRISIS ON AUDITING. Retrieved 01 17, 2017, from https://www.matarka.hu/koz/ISSN_1588-6735/GTK_vol_8_no_1_2010_eng/ISSN_1588-6735_GTK_vol_8_no1_2010_eng_131-142.pdf Schelluch, P. Gay, G. 2006, "Assurance provided by auditors reports on prospective financial information: implications for the expectation gap", Accounting and Finance, vol. 46, no. 4, pp. 653-676. Sikka, P. (2009). Financial Crisis and the Silence of Auditors. accounting organisations and Society . Simpson, S.N.Y., Aboagye-Otchere, F. Lovi, R. 2016, "Internal auditing and assurance of corporate social responsibility reports and disclosures: perspectives of some internal auditors in Ghana", Social Responsibility Journal, vol. 12, no. 4, pp. 706-718. Solaiman, S.M. 2006, "The Enron collapse and criminal liabilities of auditors and lawyers for defective prospectuses in the United States, Australia and Canada: a review", Journal of Law and Commerce, vol. 26, no. 1-2, pp. 81. Walker, K. 2010, "Historical Perspectives on Economic Crises and Health", The Historical Journal, vol. 53, no. 2, pp. 477-494. Xu, Y., Carson, E., Fargher, N. Jiang, L. 2013;2011;, "Responses by Australian auditors to the global financial crisis",Accounting Finance,vol. 53, no. 1, pp. 301-338.