Auditing And Assurance Services For Global Financial Crisis

What is Global Financial Crisis?

Discuss about the Auditing and Assurance Services for Global Financial Crisis.

The assignment is regarding the auditor’s role and liability in the companies. It discusses how the auditors played a major role in the fall of the Lehman brothers and what the potential liability of the auditors is after the incident which shook the economies globally. The period of financial crisis was very tough for the auditors as it was difficult to prove their authenticity in work and genuineness. The auditors who are believed to be the fair authorities who provide true and fair judgements on the books of accounts were doubted. The report is prepared on the behalf of the chartered accountant firm for the partner Sally Smith to showcase that what are the potential liabilities of the auditors after the global financial crisis.

There are four dominant audit companies in the audit market across the world. The involvement of one of these companies in fraud with the leading company in USA has created huge chaos in the market. This paper seeks to discuss the financial crisis, what led to such a big financial crisis and what role the auditors played in the same. It will raise the issues of the liabilities of auditors, their quality of work and their independence.

Global financial crisis is the period of economic crisis and crunch in the economy of the whole world where the amount of debt in the economies was far more than the repaying capacities of people. It was initiated with United States of America where Lehman Brothers, one of the top investment and financial bank of the country was declared bankrupt because it was under huge burden of borrowings and had no money to pay. The debt markets fell sharply which became the reason for the fall of markets (Oldani, et al., 2016).

In the global crisis, the debts were created in such a large amount in the market which became tough to repay by the people because their incomes were lesser than the debts. People started failing to repay their loan taken which slowly and gradually resulted into the bankruptcy of banks (Valentine & Woods, 2010).

Auditors are those specially certified Chartered accountants who are legally allowed to carry on the investigations and audits of the companies and their books of accounts. They are responsible for examination and verification of the accounts of the company. It is done to prepare and develop a final report which consists of the independent opinion of the auditors about the company’s financial position. In this report, the auditor is required to present his true and fair opinion about the company position financially (Ip, 2012). This report helps the investors and other stakeholders to take their decision. They rely on the audit report given by the auditors. When the financial crisis took place, the auditors were required to follow the standards of auditing and present what the companies are going through and what their books of accounts are representing. This will safeguard the interests of the related stakeholders (Zhu, 2012).

Liability of Auditor in the Period of Global Financial Crisis

 As per the standards of auditing, the independent auditor is responsible for providing a correct view on the financial accounts of the company. It also says that the standards of auditing are required to be followed by the auditors while performing audits. Providing true and fair view on the accounts saves many investors and other stakeholders.  The auditors who do not follow the standards and rules can be sued for not working in the fair and honest spirit (Todea & Stanciu, 2009).

Lehman Brothers was one of the biggest names in the investment and banking industry till it declared itself insolvent in Sept 15, 2008. A situation of panic was aroused in USA and in the whole world. The share markets fell and it was understood that this financial crisis is going to be bigger than any of them occurred till date (D’Arcy, 2009). Lehman Brothers was bankrupt and had failed to carry on its functions further. There were 28000 people working in the company who got unemployed at once.

It was found that auditors of Lehman brothers are at fault because they knew about the failures and they did not disclosed the same in front of public. Ernst & Young was the auditor of Lehman Brothers and it is also found that the auditors were paid with a very huge amount of $31 million for concealing the facts. Lehman Brothers was audited by a team of auditors by Ernst & Young. This team did not receive full support from the team of internal auditors of the company. There was a lack of cooperation between the internal and external auditors (McDonald & Hillis, 2016).

Ernst &Young was required to verify the accounts properly and disclose the real situation of the company. It was found that the company used Repo 105 to show better position of the company but Ernst & Young never disclosed that. They should have disclosed the original issues or the problems of Lehman Brothers in the audit report which would have served as an alarming sign for everyone attached with the company and their profits (Sikka, 2009). The immaturity of the audit firm led to the emergence of financial crisis. Lehman brothers were under the liabilities of $ 50 million. The company was using the incorrect and unacceptable methods of accounting which was hidden by the auditor (Jones, 2011).

The investors of Lehman brothers sued Ernst & Young. Ernst & Young paid $99 million to the investors to close the case in 2013. Till now, Ernst & Young do not accept that it was being involved in the fraud (Xu, et. al., 2013). The main duty of the auditor is to collect, check and verify the books of accounts and to present their true and fair view in the audit report. Failing to this, auditor is responsible for being involved in the fraud.

Lehman Brothers- The Case

The case and collapse of Lehman brothers cleared the roles and responsibilities of Auditors towards the audit function of the firm. The auditors are accountable for conducting a proper investigation on the books of accounts because, it is the financial situation of the company on which the public relies and believes (Boyle & Mahoney, 2015). The company takes decisions for their business but for that auditor is not responsible. The auditor is responsible for not identifying the errors and frauds and for not disclosing it in the public. It is either because they are paid high for the same or they are not able to identify the frauds and errors in the company (Dragos, 2010).

The situation of financial crisis has created more responsibilities towards the auditors. They have to apply more knowledge and effectiveness in their work. The companies have to work now in the completely different manner i.e. by following the standards, by verifying the accounts better than before. The auditors lost their trust when Lehman brothers collapsed. So, they now have to be more accountable in the processes which can establish the trust of public again on the auditors (Aziz & Omoteso, 2014). They have to show more quality in their work and the auditors today, have to follow standards properly so that no chance of misrepresentation or fraud can arise. The audit firms are now made more structured and more safe which takes care of the honesty and integrity showed in verifying the books of accounts. The audit company makes up varies strategies so that the auditors can face lesser risks and can perform better even in the fluctuating markets (Flores, 2011).

The potential liability of the auditors’ shows that the auditors should accept the audits which do not involve risks. The companies which follows doubtful procedures and have vague books of accounts should not be accepted by the audit firms. It will reduce the chances of frauds and risks in which auditors are involved or they are involved. The standards of auditing are required to be followed because this will also reduce the criticism rate faced by the audit firm. Auditor is one which represent true and honest views about the company and its financial position of the company on which the investors can rely (Ciro, 2016).

The auditors can be held liable if they breach the contract or the letter of engagement. They are also liable for providing wrong opinions on audit. Another liability of auditors is to follow the auditing standards. There are two types of liabilities the auditors may face, that are civil liability and Criminal liability (Legg, 2009). These liabilities may arise when the auditor is careless during the audit performance in the company, when the investors have to bear the loss because of breach of duties by the auditor, when the auditor is involved with any fraudulent activities or he have the intention of committing fraud or when the auditor has not represented the financial statements correct and accurate. This is because the foremost priority of the auditor is to focus on the accounts so that they can provide their honest opinion to the investors (Rapoport, 2010).

Potential Liability of the Auditors which they Face after Global Financial Crisis

The liability of auditors has become a very important concern in recent times. The investors and the creditors when invest or lend money to the company, they go through the audit reports which are considered as the admission tickets for them, without which they will no enter in a relationship with the company. The audit report adds credibility to the financial accounts and transactions of the business (Pal, 2010).

The financial crisis of 2008 showed many problems and inaccuracies on the side of auditors. It led to the failure of the audit industry because the collapse of Lehman Brothers was considered to be the biggest reason behind the financial crisis across the globe (Geiger, et. al., 2014). Not only Ernst & Young was blamed to hide the real situation of the Lehman Brothers but the big audit firm PricewaterhouseCooper was also accused of not disclosing the risk management issues of AIG. So, the problems further increased. The auditors and the audit firm began to lose their image in the market. So, the auditors need to test the level of risks in the company before taking up its audit. This is followed after the global financial crisis which is done in order to reduce the risks of audit (Fraser, 2009).

Conclusion

It can be concluded that Audit industry has gone through many concerns after the global financial crisis. It is seen that Auditors has the liability to plan the audit and conduct it fairly by following the accounting standards which will maintain the quality of audit and the risks will be reduced. The auditors are required to fulfil their duties which are to conduct the audit properly and to provide their “true and fair” opinion on the books of accounts of the company. If they find any error or something risky with the transactions performed by the company, they should inform about it in the audit report after investing on it. The report contains the potential liability of the auditors after the global financial crisis took place. The case of Lehman brothers was discussed that how it led to the crisis of credit across the world. It was found that the audit firm of Lehman brothers, Ernst & Young did not provide any information about the malpractices and the insolvency position of the bank in their audit report. There was in cooperation between the internal auditors and the external auditors too which led to the non-disclosure of the company’s inappropriate accounting methods.

The auditors are liable for providing quality work, their view on the financial statements of the company which should be true and fair. The auditors should follow the requirements and standards in order to make their audit work strong and on which the investors or creditors can rely. For this, the auditors began to take only those audits which are clear in terms of financial activities and they also focussed more on establishing cooperation with the internal auditors so that the real situation of the can be ascertained. It will definitely increase the image and goodwill of the auditors in the company. It will also bring confidence in the markets.

Some recommendations can be given which supports in making the audit procedures free from complications and enhance the quality of the same. The auditors are suggested to select the companies which are free from the allegations, and their accounting measures are free from any doubts. These companies can be chosen by the auditors. The auditors should put more emphasis on the planning of audits which means that a proper blueprint should be created in order to enhance the quality of the audit procedures. The auditors should focus on following the standards which are given by the International Accounting Board. It will enhance the credibility of the auditing procedures. The communication with the internal auditors should be effective so that the audit procedures can be carried smoothly.

Auditors should focus on new method and technologies of audit which does not only increase the quality, effectiveness but also decrease the time taken in the whole process. The fees taken by the auditors should be decided as per the criteria’s decided. The audit firms can also go for joint audits where two or more audit firms work together in order to prepare a final audit report. Joint audits are possible in case of big companies where there are ample amount of transactions to check and verify. It will help in reducing the frauds and errors form the audit report and procedures. The auditors should be fair and should work to gain back the trust of the public and image in the industry.

The government or the board which handles audit companies in every country should encourage the auditors to display their positive effects of the fair audit. The present business environment is dynamic which needs new methodologies and techniques to conduct audit.  It will help in making it easier to detect if any fraud or error is present and will also increase the credibility of the audit report. Roper documentation should be maintained by the auditors and the companies conducting audit. It will have the record of all the related affairs in the documents which can be accessed if needed later on. The questions of the public should be answered which will also increase the trust and honesty in the firms and audit procedures.

References

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