Auditing and Assurance Organizations and Society

Question: Discuss about the Auditing and Assurance for Organizations and Society. Answer: Introduction: The Lehman bank was the fourth largest bank in the US and the business was suffering from the financial risks. During the first decade of its operation, cotton was traded by the company and eventually it took up the banking and became the investment bank. Mergers, acquisition, underwriting of the securities and issuing of the securities were mainly the financial services provided by the investment banks. Such investments bank were being prone to risks and they were inherent risks and the failure of Lehman brothers to manage such risks forced it into bankruptcy. The failure of Lehman brothers was not only attributed to the banking but it was also due to the human failure incorporated in its corporate governance. The economies and the financial market was devastated due to the failure of investments bank. The bank made changes to its investment strategy in order to compete in the extremely competitivemarket of the investment banking. The bank focused on long term investment. The bank h eavily issued mortgages and subprime loans. The Lehman brothers invested all the proceeds from the borrowing in the mortgage market when the housing market was booming. The mortgage market was over concentrated which made the bank vulnerable and there was a downfall in the price of housing (Fernando et al.2012). How auditors were liable in the Lehman collapse: The investors of the company were misled and the directors of the company were mainly responsible for it. The auditors of the Lehman brothers concluded that the financial statements does not suffer from any flaws and is appropriate. The company employed the fraud for reporting the financial statements and this was done to intentionally conceal the fundamental weakness of the investment bank (Mishkin and White 2014). The auditors of the company did not detect such defect and it was under appreciated for over a substantial period of time. The bank in order to obtain the short term loan by using its own securities as collateral made use of repo which is the financial tools used by all the financial institutions. The repurchase agreements were regarded as the secured borrowings and it was thought that the accounting of these repo was done as per the US accounting standards. The Lehman brothers were able to convince the auditors that the overcollaterizing the repurchase agreement would br ing the economic benefits to the company. The acceptance of the auditors regarding the loans overcollaterizations to the sales was mainly responsible for the collapse of the company (De Haas and Van Horen 2012). The case of Lehman brothers are greatly related and linked with the global financial crisis as it leads to the drastic downfall of the global economy. The cost of the collapse was huge and the global economy was significantly impacted. The global finance meltdown was triggered by the collapse of the Lehman brothers. It collapse led to the financial crisis and were the cause of great recession form which the world has not recovered fully till now. The emerging markets were greatly affected by the collapse of Lehman brothers. The markets of Europe and US were hit hardly. The banking system of UAE and its liquidity crunch was exacerbated by the shock waves sent by the Lehman in the global financial markets. Kuwait was another Middle East country to be hardly hit by it as the emerging investment companies went insolvent because of the fall in the value of the assets and the drying up of the funding of these companies. The market of debt was broken because the unhedged derivative position were wiped off with the fall of Lehman brothers. The debt holders, equity holders, and the derivative trade that were in counterparties with the Lehman was broken due to its failure. Therefore, the collapse of the Lehman brothers has directly led to the economic crisis (Caplan et al.2012). Auditors role in term of liabilities The auditors are held liable for the civil as well as criminal offences. The auditors role for a company is different from that of firm. The liabilities of the auditors arise on account of the duties for which he is held responsible. The liabilities of the auditors are divided into four parts. This is civic liability, criminal liability, liability of libel, and the liability towards the third parties (Lu and Whidbee 2013). Under the civic liability, the auditors are mainly held liable for the negligence. If the company suffers loss on account of auditors then he has to make good the loss suffered by the company. He cannot be held liable for the loss suffered by the company when there is no negligence on his part. The various act are used to hold the auditors liable under the criminal offences. The income tax act, banking companies act, life insurance act, Indian penal code act. The auditors is held liable only to the employer and he is not held liable to the third parties in general. If the auditor has made any statement without any malice and is bonafide then he would not be held liable for the statement made by him (Iatridis 2012). Use common law cases for auditor liabilities The auditors under the common law can be held liable for negligence, fraud, breach of contract. The limitation of the exposure to the liabilities by the auditors and the application of the law in the profession of audit is depicted by the several cases. It can be explained with the help of following cases: The case of Caparo industries Plc versus Dickman. The company persuaded the firm Touche Ross to purchase the share of the firm called Fidelty Plc. The decision to purchase the shares was based on inappropriate disclosure of the companys account that overvalued it. The auditors of the company fidelity owned potential investors as duty of care. The claim made was not successful. The following conclusion was made by the house of lord that the purpose of accounts was of no reasonable knowledge to the auditors and the shareholders exercise their rights as the accounts were prepared for the existing shareholders. This case provides the guidance for providing the duty of care between the third party and the auditors. The imposition of the liability on the Caparo is reasonable and fair. There is a proximity of relationship between the Caparo and the Fidelity Plc. The case of Royal Bank of Scotland and its auditor Bannerman Johnstone MacLay. The company has lost 13 million to its insolvent client APC Ltd and the loss was in regard to the facilities unpaid over draft. The claim was made by the company that the Bannerman was not able to detect the material misstatement and the fraudulent activities in the APC Ltd account. The company used to receive the audited financial statements every year and on the basis of this the company used to provide the banking facilities. The intention of the RBS to make the lending decision using the audited financial statements of APC ltd, which the auditing firm would be aware of the banking facility of the APC ltd. This was the reason that the duty of care was owed by the RBS. The judgement passed by the court was that significant factor which contributed to the duty of care owed to them was the disclaimer of liability and its absence in regard to the third parties (Ellis et al. 2014). Another case is about the Kripps case. The liability of the auditors regarding the third parties which was an upshot of the decision of the Kripps that the auditors can be held liable for the negligence if the auditors is aware of the specific use of the financial statements which have been audited despite the fact they comply with the national reporting standard in the event of financial reporting. The judgement about this matter is that there is uncertainty in the standard which would be considered appropriate to measure the conduct of the auditors. The case of Columbia Coffee and Tea Pty ltd which was held that the auditors hold liability to the third parties and this is because the auditing firm contain the statement in the audit manual that the third parties can rely on the audited reports to make their decision. The judgment and the outcome of the this case was that in the event of the misstatement of the financial statements, the investors has no right to sue the auditors because the duty of care does not exist between the shareholders and the auditors unless the facts of case comes with the special circumstances. The auditors would not have duty of care even if he is aware of the fact that the investment decisions would be made on the basis of the audited financial statements (Gimbar et al. 2016). Potential liability that auditors face as a result of the global financial crisis: In the event of financial crisis, the mistrust is reflected in the financial system and such event might be regarded as an opportunity to rectify some financial system aspects, that is the drawbacks which has led to such event. The liability of the auditor is to evaluate the use of the internal control system. He has the obligation in conducting the audit work to take the accounts of level. The improper manifestation of the internal control system would not enable the auditor to identify the risk of error and fraud. In order to obtain the reasonable assurance on part of the auditors that the financial statements are free form defects and are significantly accurate, the auditors are held liable to perform and plan the audit. Another liability is related to the adjustments and corrections to be made in the financial statements. The auditors have compliance and direct related liability with the reporting of the accounts even though the audited entity has exclusive responsibility of mana gement over it (Brigham and Ehrhardt 2013). There is no difference between the liability of the auditors in the errors detection and the liability in the detection of fraud as per the auditing standards. There are several aspects regarding which the financial system needs increased transparency. The auditors are held liable for identifying the origin of the risks and assessing the risks as this would assist the auditors in super visioning and improving the regulations governing the financial system. The auditors needs to conduct the auditing procedure in accordance with the professional and legal standards as the report generated form the conduction of the audit is send to the owners of the company. The financial auditors assumes a great responsibility when the audit mission is performed by him in terms of the nature of the services which is rendered and the engagement of the audit (Arel et al.2012). The professional skepticisms needs to be exercised by the auditors in the event of determination of the duration, nature and the procedures of the extent of the audit. This also has to be done in the event of evaluating the audit results and the evidence relating to the audit. The most important liability of the auditor is to confirm that the financial information depicted in the financial statements of the company have been reflected correctly and fairly concerning all the transactions and the material aspects and formulating the opinion on such statements which are in aligned with the above declaration made. The potential liability of the auditors may increase if there is any occurrence of the events that took place after the date of the formulation of the balance sheet (Aydin 2013). The controlling of the quality of the audited work is also the liability of the auditors and the auditing company needs to ensure that whatever is being done that is the auditing work, is done well. When auditing the financial statements, the auditors need to consider the same and is liable to prevent such frauds in the implementation of the control system of the company. The auditor has to make sure that the financial statements are not inaccurate of the error and fraud whe n planning and performing the audit. Recommendation: Different scenario were represented by Lehman brothers in identifying and defining the risks related to their business. The company would have avoided a lot of market risks if it had invested in correlated assets heavily rather than investing only in mortgage assets. The consequence of the collapse of the bank could have been less fatal if the bank would have invested in diversified portfolio rather than concentrating its portfolio. The loss would not have triggered if the company would have sold the troubled assets earlier and the control system had received focus. The collapse was mainly attributable to the corporate governance and the inability of the auditors to detect the ongoing scenario. There are sometimes very complicated functions relating to the functioning of the audit. The auditors. Whenever the auditors are forming the opinion on the complicated matters needs to keep in mind the financial consequences of such advice because the clients and the shareholders make the investment decisions based on such decisions. The company needs to save themselves in the event of global crisis and they need to take the correct strategy in delivering to the masses and taking their way out of the financial crisis. The company needs to have brand strategy so that it is able to prevent the damage caused to the reputation of the brand and at the same time imbibing the steps which would help them in restoring the trusts of the consumers. In order to recover a brand from the global crisis, the company needs to follow a communication strategy which would help in building the image of the brand. The company should build the regain the trust of stakeholders using this strategy. Conclusion: The discussion is about the collapse of the investment banking company Lehman brothers and the collapse was mainly attributed to the failure of the corporate governance and the incapability of the auditors in detecting the wrong doing business and forming the false opinion on the basis of which the investors invested in the company. The collapse of Lehman brother had impact on macro and micro level and the company invested their money in complicated investment which needs to be understand as it led to the devastating impact on the financial system and the economy worldwide. The auditors should make it very clear to the clients that their advice is subject to some limitations and if the client is considering it in depth then it would lead him to revise the advice. The auditors need to ensure that the statement issued by the client would bear the name of the auditors only if they have received their consent. This is because most of the third parties base their investment decisions based on the statements issued by the client which relies on the auditors report which they think is financially sounds and well conducted. The auditors need to reduce their exposure to the litigation as this is costing the audit professions heavily. The case also discusses the liability of the auditors in the vent of global crisis and whether they should be held responsible for the downfall of the company. However, it cannot be concluded that the auditors are solely responsible when the company does not conduct its business activities in the true and fair terms. Reference: Arel, B., Jennings, M.M., Pany, K. and Reckers, P.M., 2012. Auditor liability: A comparison of judge and juror verdicts.Journal of Accounting and Public Policy,31(5), pp.516-532. Aydin, A.D., 2013. 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