Answer To: ACACT304A Audit and Assurance Services Assessment 3 – Individual Case Study Essays (20% Weighting)...
Prince answered on Sep 08 2022
Auditing and Accounting Issues in Lehman Brother’s
Student Name
8th Sep 2022
Introduction
Global financial organisation Lehman Brothers offered brokerage, trading, investment banking, and other services. In terms of size, it ranked as the 4th investment bank in the country. Lehman Brothers' collapsed on September 15, 2008, marked the biggest insolvency in the United State history (Wolff 2011). The 2008 financial crisis was caused by the bankruptcy of Lehman Brothers, which had a domino effect on the world economy (Wolff 2011). Lehman Brothers' demise was mostly brought on by reckless lending during the 2003–2004 housing boom (Sraders 2018). It bought five subprime lending companies and afterwards experienced a historically high subprime loan default, which caused it to collapse (Sraders 2018). In brief, it was a risky move into subprime lending that involved excessive leverage and became the catalyst for the 2008 financial crisis that led to the collapse of the banking and housing industries (Sraders 2018). The Lehman bankruptcy incident has sparked discussion about the independent auditor's historical function as one of the few management checks and if these companies still owe obligations to the general investment public. When auditing Lehman Brothers' financial records, independent auditor Ernst & Young was accused of professional negligence (Miseviit 2015). Lehman Brothers' auditing was not performed with sufficient accuracy to identify and prevent a probable collapse.
This situation was unexpected by a number of key stakeholders in the business, including the owners, shareholders, creditors, and clients. They had not expected the insolvency, let alone the collapse, of the fourth-largest investment bank. In part, this was because of the reliance that people at the time had on inefficient auditing techniques. In this report, we'll talk about the concerns with negligent auditing and an absence of professional scepticism in the Lehman Brothers case.
Auditing and Accounting Issues
Weak and ineffective auditing is what led to the unforeseen collapse of the investment firm. The absence of professional scepticism will be the main topic of discussion for the audit issue. Professional scepticism is described as "an attitude that comprises a questioning mind as well as a critical appraisal of audit evidence” by Arens et al. (2017, p. 112). As a result, while auditors cannot assume that management is dishonest, it is noteworthy that the likelihood of dishonesty is considerable (Arens et al. 2017, p. 112). Professional scepticism is crucial for the quality of the audit since it demonstrates the effort auditors put forth to test the sample and look for proof that the books with statement transactions match. Lehman Brothers served as an example of an object lesson that really was ready to be learned: complicated transactions must have their substance well understood, correctly recorded, and effectively reported to those who would be using the financial statements. In actuality, the repurchase agreements were secured loans rather than outright sales, and the accounting industry had...