Introduction of As 701 with the Collapse of Lehman-Free Samples

Question: How did Lehman Collapse? Answer: Introducation: The title of the report is the introduction of new auditing standard 701 and the collapse of Lehman Brothers. Auditing Standards are issued by the auditing standard board and is made available to the auditors of the company to perform their audit in the effective and efficient manner. With the aim of analyzing the new auditing standard with regard to the case of Lehman Brothers, the report has been divided into defined sections. In the first section, the history of Lehman Brothers have been explained in detail as to how the company has come into place and made itself known to the market across the country. In that section only the reasons for the collapse of the company has been discussed in detail with reference to the conditions prevailing at that time. In the second section, the meaning and the purpose of the auditing has been explained and details as to why the auditor issues the audit report to the company and how the audit report has been considered as the useful document for t he users of the financial statements of the company. The concept of independency has also been discussed in relation to the auditor while issuing the auditor report. In the third section the meaning and purpose of the issue of new auditing standard 701 has been discussed in detail with regard to its content. Thereafter it has been mentioned as to what key matters are required to be disclosed and what key matters would have been disclosed by the auditor of the company through which the collapse would not have happened. At the last, the conclusion has been made citing the overall findings of the study and then the recommendation has been made. Lehman brothers History of the Company The history of the company starts from the early years of eighteen hundred and forty. The owner of the company namely Mr. Henry Lehman who has come to United States of America for the purpose of business and has opened the shop where dry goods are sold to the nearby customer. As the time passed, he is joined by his two brothers. After their joining they realized that the United States of America is the hub for cotton market and the company can achieve gains in the short period of time if it starts to sell the cotton to the customers. They have then adopted the strategy where they start selling the dry goods to the customers not in cash but in exchange of the dry cotton. With this strategic thought the company starts making profits in the shorter period of time. Soon after the knowing of then cotton market, the company came to know about the hub commission house which is placed in other part of the United States. Simultaneously the English civil war has started which have given the wa y to company to get engaged in the business of the banking coupled with the commission business. During and after the war it has been recognized that many roads have been damaged, the offices of many people including the houses have been damaged. In order to gets it renovated or able to work again, the individuals including the companies started finding the way to have the loan from the external; agencies including the banks or other financial institutions. In this era the Lehman Brothers have got themselves engaged in providing the loans to their customers and have helped to build the railway system and to renovate the roads and re build the houses and so on. With this expansion the companies have entered their step into the market of banking industry and have been regarded as the one of the leading companies engaged in the investment banking. With this the Lehman Brothers have come up with all the ways from 1844 to 15th of September, 2008, the day on which the company was collapse d (HBS, 2014). Factors causing collapse After coming from all the ways from the year of 1844, the companies have the condition when it has been forced to file the bankruptcy application for protection before the authorities. The collapse of the company has not occurred suddenly rather there are the circumstances which have been prevailing from the last eight consecutive years. The application was filed on 15th of September 2008 and has been marked as the historical date in the books of the banking industry. The factors which have caused the collapse of the company are discussed below: First reason for the collapse is the accounting fraud that the company has been doing with the inclusion of the auditor and management of the company. They are violating the essence of the Repo 105 transaction and have making the accounting entries at their own convenience rather than following the rules of the transaction. The Repo 105 transaction states that the company can sell its securities for the short period of time to the customers and will repurchase the securities after completion of the specified time at the premium (Johnson, 2012). The proper agreement is required to be executed for the sale and repurchase and is referred as the Repurchase agreement. Accordingly the company shall hold the liability in the books of accounts till the securities are repurchased at the premium. In the given case Lehman Brothers have adopted the strategy where they execute the proper agreement of repurchase but do not intend to repurchase the same and not showing the liability rather they hav e accounted the transaction as sale of securities in the statement of Profit and Loss (Azadinamin, 2013). From the cash so made available with the company, the company has started setting off the liabilities and has been successful in setting off the fifty million dollar liability. Due to this the company has been reporting the high turnover and high net profits at the quarter end and at the year end (Chadha, 2016). This fraud has been perpetrating in the books of accounts for the last eight years and the time has come when the company is now under the pressure to either repurchase the securities or file the bankruptcy application. As the company is not having any funds to repurchase the securities, the company has adopted to move an application for bankruptcy. Second major reason for the collapse is that the company was unable to find any buyer. The time when the Lehman Brothers have collapsed, most of the banks are in that situation only but they have easily found the buyers and have successfully sold whole of the company to the acquiring company (Farndale, 2008). The Lehman Brothers have been delayed in looking for the buyer and when they have found the buyer Barclays Bank, then the Government has refused to allow for such acquisition and resulting to the collapse of the company (Maux and Morin, 2011) The third major reason for the collapse is that the company was unable to finance it short term requirements as they earlier use to set off from the short term loans that they avail from the bank using the credit facilities or on the pledge of the securities (Dutta, 2010). When the company has declared the net loss on the quarter ending June 2008, then every stakeholder have started backing out from the company resulting in shortage of funds in the company. Further the Federal Reserve Bank has also denied giving the amount of loan to the company to revive its operations. Apart from the above factors there are other factors too that have resulted in the collapse of the company are improper management of the cash flows and ineffective management of the company. Auditor's Report Purpose and Content The auditor of the company is the person who checks the accounting books of the company and financial statements of the company prepared by the management of the company. The auditor after checking the financial statements of the company is required to give his opinion and his opinion so formed shall be objective and independent. If it is not done then he will punished with guilty of professional misconduct. In the auditor report the auditor is required to report whether the company financial statements of the company represents the true and fair view of the financial position and performance of the company or not. Clean Report Issued In the given case the auditor has been issuing the Clean Report of the financial statements of the company. The auditors of the company were Ernst and Young. The auditors of the company were in believe that the company was entering into Repurchase transactions and following the provisions of the standards as defined in the accounting standards (Chatterjee, 2015, Mc 2010 and Inman, 2014). But in actual the company has not been making the financial statements of the company in accordance with the accounting standards and the provisions of the Corporations Act 2001 and the company with the connivance of the auditors has done this very successfully which have remained undisclosed for the period of consecutive eight years (Coenen, 2010). The auditor of the company have folded their hands and authenticated the financial statements of the company with the blind faith that the company is doing and following all the work in the letter and spirit. As per the given case study, the auditors are aware of the fact of the massive accounting fraud that is being done by the company but despite of this fact the auditor have issued the clean report only on the matter of the financial interest that the firm has seen and the audit firm have sacrificed the integrity, objectivity and the independence of the auditor and sign the balance sheet with clean report (Goldstien, 2014). This financial interest amounts to one hundred and fifty million dollars over the last eight years. In this manner, the auditor has issued the clean report. New Auditing Standarg 701 Purpose of Issue The new auditing standard relating to Communication of Key Audit Matter by auditor has been come into existence in 2015 and applicable in 2016 on the auditor. The standard describes the detailed responsibility of the auditor before issuing unqualified report by the auditor. The new principle enhances the role of the auditor to make him liable more towards the stakeholders and towards those charged with governance. The main purpose of the audit standard is to provide transparent information about the affairs of the company and highlighting the affairs which require more attention of the stakeholder and on that basis steps can be taken by stakeholders in order to reduce the impact of the information reported as Key Audit Matter by auditor (AASB, 2015) Content The audit standard defines the matters which can be considered as Key matters and how the auditor will identify these Matters and what has to report in relation to identified key matter by the auditor. Any matter in the working of an organization can be considered as Key Audit Matter if it is communicated by those charged with governance to auditor and also include the matters which identified by the auditor with use his professional knowledge and judgment. The auditor professional experience and verdict plays important role in assessment of Key Audit Matter which require reporting. The following areas which are considered as Key Audit Matter in the organization and should reported in the auditor report: Areas which are defined as highly significant risky areas under Auditing Standard 315 which can create the situation of danger in the policies and procedures of the company. Areas where accounting estimates has been used by the company in order to get the value of particular transaction like estimate taken for useful life for calculating the depreciation on fixed assets by the management. Important matters which can have impact on ten disclosure requirements of the financial statements of the company. Required Key Audit Matters In Lehman Brothers Audit Report The application and effect of the new auditing standard should have be done by the auditing standard board retrospectively from the year before 2000, then fall back of the Lehman Brother can be avoided and major crisis in the finance industry can be avoided. The following are the Key Audit Matters which the auditor would have report in case of Lehman Brother and the corrective actions would have been taken by those charged with governance on the basis this key audit matters: Reporting of Repo 105 transaction and its treatment- The Repo 105 transaction which are prevailing in the banking industry were inappropriately used by the firm. In the Audit Key Matter the auditor should report that the company is selling short terms securities and receiving cash from them. The sale has considered as operating sale by the firm rather than taking it effect as borrowings. Also, the firm pays of its liabilities standing in the balance sheet from such cash received without considering the fact that this amount together with interest has to be return by the firm after lock in period of two year. Continuous decrease in Liquidity Position The auditor should report as key audit matter about significant risk which has been created on the liquidity position of firm from its operations. There are many times the firm is in crunch of liquidity and borrows funds from outside fulfill the liquidity requirement. The result of the situation deteriorated the cash and cash equivalents of the company from $ 167 million in last few years creating significant high risk on the firm continuity (Masytoh, 2010). Conclusion The report has been prepared keeping in mind the scam created by Lehman Brother which is the basis for US crisis happened in 2008. The scam of Lehman Brother affects 40 countries in the world where the company has major operations and creates a remarkable damage to financial market including the banking sectors. The route of the scam has been started in year 2000 and continued till 8 eights after which the firm has declared the bankruptcy and file the application to Federal. It has been concluded from the report that the root cause of the scam is the collision of the auditors and the management of the company who made the frauds at the accounting level to mislead its stakeholders. It is recommended from the study; the auditor should perform his duties with full ethical principles and shall not infringe the basic purpose of the accounting and auditing standard. The auditor should take due care and should report all the matters which can hamper the interest of the stakeholders. 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