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 Matters in 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 in the period leading up to the collapse of Lehman Brothers.
Explain how this was not forewarned in the auditor’s report which gave an unqualified opinion before its collapse. Explain how the new auditing standard ISA 701 Communicating Key Audit Matters in the Independent Auditor’s Report may provide additional information about the impending collapse of Lehman Brothers, explaining clearly what these matters are. Also, state clearly what the auditor of Lehman Brothers would have disclosed in “Key Audit Matters” if ASA 701 was applicable then as well explain how this would be an improvement in auditing practice.
Lehman brothers was referred to as the global financial services organization that suffered bankruptcy in the year 2008 that led the firm towards huge financial crisis. Lehman Brothers was considered to be one of the largest investment bank in and round United States. It was in the year of 2010, it was examined under the court supervision that the firm sued to prepare cosmetic accounts and reports that stated that their finances were less and non-profitable. This practice of Lehman Brothers can be stated as repurchase agreement that allowed them to remove securities and limit the data from the balance sheet temporarily. Such practice created a deceitful financial structure of the firm causing them bankruptcy when they were supervised under strict regulations. The audit report underwent certain issues that brought about the collapse of eth firm. The study presents the report regarding the causes behind the collapse and how far they could have been mitigated the issues and the improvement towards auditing practice. The report is divided into segments that include analysis of the collapse, research outcome and evaluation, and recommendations that enable the possible strategies that would improve the audit practice and develop the financial condition of Lehman Brothers.
Lehman Brothers are doing business from 1844 and the company has faced with many of the challenges from the market. Auditing mainly comprises the idea of creating a broader aspect in the financial statement. The misstatements in the financial database get an impact from the auditing report. The auditors create the financial report of the organization to assess the information regarding resources and materials (Dimitrova et al. 2016). For the fulfillment of internal and external purposes the organization put a strong impact and affirmation to the auditing system. This auditing system will help in evaluating the reliable and authentic information of the financial status. The internal controls get a strategic pathway by the help of the auditing policy within the organization (Gaynor et al. 2014). The efficiency and effectiveness that the auditing reports present, helps the company to forecast as well as to get the report of financial condition. To meet with the financial objectives the company by taking help from the auditing system it tries to create a systematic and reliable financial positioning for the company. As the financial status through auditing will serve the purpose to clear out the fraud, misplacement of resources moreover prevention of any of the operational treachery. Company can hire independent auditors who will take care of both the internal and external audits along with that company can have their own auditors who will take care of the each processing.
There are various corporate objectives that any specific organization has and by the effective procedure of auditing the company can attain and meet with success. This auditing process maintain a structure, and it’s include assessment, supervision, monitoring and finally the implementation of entire thing. Internal control system get reviewed by the internal auditors as they present an appropriate design for the whole procedure (Anderson et al. 2014). The information that take help from the auditing system proceed the organization for presenting a document that will help in solving problem regarding irregularities of operations and other things, material displacement. The further investigation system of the management get judged by the auditors and described to get a warranty under any of the circumstances in the organization. Risk management taken care by the financial auditing (Simnett and Huggins, 2014). The financial report of the organization will help to produce the database for any of the misstatement. By the help of auditing it gets a clear idea that how they can secure their value in market so that the customers take more interest to the company's products and services moreover the company can able to plan up for the allocation of resources (Prasad and Chand, 2017).
However, it could not able to tackle the organization's affairs, as it would not comprise the capability and aptitude to present the status of its various assets and liabilities and would be captured unreliable in the marketplace, the reason being its incapability to deliberately produce its goods and services in a suitable and dependable process. On that basis, an audit structure is essential in surpassing a debilitate misstatements within a company's reports and records.
Auditor’s role in the global financial crisis:
The financial crisis in the organization get helped by the auditors the Securities and Exchange Commission’s create a bigger aspect in the organization. The financial crisis deeply connected and implicated in the accounting practices. The global financial crisis will help in strategize the plans for achieving company’s objective. International Federation of Accountants (IFAC), has accounted that the global financial crisis affects a lot to the big multinational companies. The international regulators and the audit firms take into consideration to the auditing policy (Bédard et al. 2014). Over the last decade the financial architecture the financial statement are deposited in the context with the consideration of the new international base which has developed in the market economy. With the usage of the explanatory stages which involves some of the bank auditing, many of the questions are asked here about the nature and reputation of practice in auditing and the administrative disposition that governs this kind of practices (Kachelmeier et al. 2014). The nature of the responses that created from the regulatory base to manage the crisis and the transpose and participation affects among the main key professional participants and regulatory in the global audit scenario. More prominence is placed on the requirement for audit researchers to be delicate to the enlarging global financial stature, and its prospective inference for the dissertation of practice in the auditing and to fulfilling in various national and international circumstances.
The auditing efficiency can prove to be a strong aspect for any organization but when it fails to deliver the best possible things then the company can face numerous problems. The collapse of Lehman Brothers processed by various other things that put a strong impact in the financial status. There are few problems that the company can face are-
i) The auditor many times failed to generate the authentic reporting and the failure in that thing can create a great mess for the company and it can directly harm the financial reporting of that specific organization (Bédard et al. 2014). The inadequate evidence of the company can sort the information for better evaluation and on the other hand the organization cannot able to assess the authentic information that it require in order to progress further.
ii) The pronouncements in GAAP, if produced in the organization failed to serve the authentic and accurate things and it became incorrect, then the organization face a strong decline in financial crisis. The technical accounting topics need to get covered and by the help of this the entire thing will get justified (Reid et al. 2016). The enforcement of the financial statement will take up the firm based decision and if the auditors are not properly present the audit report then it can create many problem for the organization.
iv) The design of the audit program is an essential thing and if it is not properly dealt then the company will fall for the crisis in financial basis. The inherent risk that can culminate from the possibility of auditing report and it will create a problem for improper assessment of whole management thing. The executives in the audit firm will forecast the entire matter and then able to take out the information related to finance (Firth et al. 2014). Sometimes the deficiency is the best process that worked as a remedy.
v) With proper engagement with the organization can serve the best information related to the financial status of the company, if the auditors are not able to connect with the organization then the presentation of the reporting will not be reliable as the internal source need to be verified by the auditors in a proper manner.
vi) The professional expertise needs to be high as it will incorporate appropriate care and structure. Enquiry over matter, evidence of the auditing process and get the confirmation about accounting receivable will help in structure the plan in more precisely. If the organization fails to do that then the transaction of the financial positioning get a threat from the company (Mo et al. 2015). The auditors need to recognize that where the drawback of the organization and after viewing that matter the auditor can put possible outcome and result of the entire thing in a positive manner.
The development in the auditing process will forecast the matter that Lehman Brothers has met the challenges successfully in participating in the strategic auditing process. The new standard in the auditing system that get followed by the company that is ASA701 Communicating Key
Audit Matters in the Independent Auditor’s Report. In this report the main concern will be in the status report that the organization present in its financial database. The liability that the organization share according to its financial position will forecast a rise of the economy in market (Doxey et al. 2015). The corporate reporting and auditing will create a standard policy for the company and the organizations who operates independently in the market. The reliable assurance that the organization provides by the help of financial database will strategize and imply the plan for putting a strong aspect in the financial performance and public reporting. To promote a justifiable statement regarding the audit report the organization will ensure each fact about auditing and during any financial crisis the organization will take help from the auditors who worked to take out this information from internal and external resources. The regulatory activities that the organization follows will further help in support the overall economic growth of the country for a specific organization, as by the strong financial standards the company can evaluate effective functioning (Hoos et al. 2014). The investors, creditors and other business persons will take help from the auditing structure and the company always wants to achieve the strategic objective in the market area so it can play an important role in delivering great things to the economy. The regulatory regime get supported properly by the help of auditing authority and this framework always promotes a continuous improvements by serving the interest of public. Auditing of the organization is an oversight subjective matter that provides a deep insight into the entire matter.
According to the secondary sources, it is obtained that the Lehman Brothers have been preoccupied with the mortgage origination which had raise a large amount of fund that can be referred to as being disguised as the investment bank. The firm had filed for bankruptcy that brought down huge financial crisis affecting the economy. It was important for the Lehman brothers in mitigating its issue earlier that was leading towards bankruptcy. The major factors that led to the financial crisis revolves around poor audit report, lack of financial statements, lack of disclosure in audit, lack of internal control, moral hazard etc. most importantly, the data and the financial accounts were misinterpreted and misjudged causing internal conflicts and confusion (Gaynor et al. 2014).
As examined, the year 2008 caused the firm huge financial crisis that hit the global economy resulting in unprecedented financial and confidential loss in relation to the subprime mortgage origination. The Lehman Brothers were highly criticized for their ill management and operations. However, the firm was unable to sell their existing bond in order to arise its status and payback its debt. As estimated, it suffered from a loss of 42.8 billion. According to the audit report, there has been wrong assumptions to the statements and accounts reducing its value in the market. There audit report did not present the account of approximately ten billion that was later found to be invested on illegal deal. In hiding important information, accounts and covering clients over false reports resulted in harming the public investments and the national economy. It is the auditors and the entrepreneurs who are held liable for such collapse and violation of national law and policy (Prasad and Chand, 2017). It is their responsibility to assess and evaluate their audit report and maintain exact and appropriate data and accounts within the report structure.
Conclusion and Recommendations:
It is observed that under eth investigation of Financial Reporting Council the firm had made allegations regarding bankruptcy as filed in the US court. this allowed the Lehmann Brothers in projecting smaller view of its financial status and business operations. The audit failure left the firm with the report of bankruptcy as numerous data was not field in eth report which was earlier warned by the council. The audit team was interviewed along with assessment of eth audit report of months, documents, files, information generated through emails and social media. The investigation was initiated and processed by the executive counsel members who later found that their money and the client’s money was separated and began its investigation on the two assets that raised concerns and doubts within eth audit structure. Therefore, it was important for the Lehman Brothers in keeping internal relationships strong that would have helped them in mitigating the issues earlier. It was important in the part of the Lehman brothers to investigate its own audit reports and accounts. It is the responsibility of the auditors in understanding and recording the appropriate details. Misleading and misinterpreting of abrupt and incomplete account leads to collapse and destruction.
It was important for the Lehman brothers to use certain financial equipment that would have keep a record of its accounts and financial statements. Lehman brothers need to have weekly analysis of its data. it struggled a lot over gaining a superior position in the market of mortgage operations that made them shift to investment and capital oriented banking sector. With such superior and dominant persuasion, the firm had neglected certain aspects of recording financial accounts that faced huge loss of documents resulting in poor presentation of audit report. Due to their previous market achievement the company assumed that they had great knowledge about the existing market structure and liability. Since it had shifted to a different sector, to an unfamiliar and rigid section towards capital and profit, it paved its way towards risks. therefore, analyzing its clients, performance and market environment is needed. It is essential to perform according to the market liability that would not bring their expectations down. The firm could have formulated regulatory policies and measures in maintaining capital requirements and ensure that it has manageable leverage ratio that would later cater towards benefiting them during crisis period and period of uncertainty. Lastly it is the investors and the stakeholders who help in running the firm. It is important to restore the trust and loyalty of its members mainly the investor who would cooperate in improving the audit quality and participate in the decision making proves towards enhancing the reliability of the firms; accounts and reports.