Lincoln Savings and Loan free essay sample

The substance-over-form concept is explained by accountingtools. com as a concept in which â€Å"the information shown in the financial statements and accompanying disclosures of a business should reflect the underlying realities of accounting transactions, rather than the legal form in which they appear. † They go on to explain that the main point of the concept is that â€Å"a transaction should not be recorded in such a manner as to hide the true intent of the transaction. The concept requires or assumes that someone is attempting to deliberately hide a transaction as one that meets GAAP standards although in reality the transaction would affect the financial statements differently than reported. This form of deceit was used over and over by Lincoln SL. The biggest example provided was on page 87 concerning the â€Å"Hidden Valley† transaction. The responsibility of the auditor is to first notify their client of this discovery. The auditor should also inform their supervisor and ensure that the transaction and any communication is fully documented. We will write a custom essay sample on Lincoln Savings and Loan or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The client should then be notified that the entry should be adjusted to reflect the true outcome. If the client refuses to make this adjustment or provide a sufficient explanation as to why the will not make the change, the auditing firm has a responsibility to themselves and the stakeholders of that company to withdraw from the engagement. 3) An auditor’s examination is affected when a client has engaged in significant related party transactions due to the increased risk of fraud. SAS 45 which supersedes SAS 6 is the source of AU section 334 which discusses â€Å"related parties†.This section provides a guideline for auditors to follow so that they are satisfied with the relationship and its adherence to GAAP. Although, â€Å"FASB Statement No. 57, Related Party Disclosures [AC section R36], gives the requirements for related party disclosures†, it cannot be assumed that all related party transactions will be uncovered. Steps that an auditor can take to determine the existence of related party transactions are covered in paragraph 7. http://pcaobus. org/Standards/Auditing/Pages/AU334. aspxThe first steps that an auditor can take to determine that related party transactions have been properly recorded are to identify those related transactions. The procedures to identify these transactions are outlined in paragraph 8. Some of these steps are to: a) â€Å"Review the minutes of meetings of the board of directors and executive or operating committees for information about material transactions authorized or discussed at their meetings. † b) â€Å"Review the extent and nature of business transacted with major customers, suppliers, borrowers, and lenders for indications of previously undisclosed relationships. c) â€Å"Review accounting records for large, unusual, or nonrecurring transactions or balances, paying particular attention to transactions recognized at or near the end of the reporting period. † Once the related party transactions have been identified, the auditor can apply the guidance provided in paragraph 9. This paragraph states that procedures that auditor finds necessary should be applied until they are satisfied with the occurrence of these transactions. An important note is that the auditor’s investigation should extend beyond inquiry of management. In particular, paragraph 9 states some of the follow procedures: a) â€Å"Examine invoices, executed copies of agreements, contracts, and other pertinent documents, such as receiving reports and shipping documents. † b) â€Å"Test for reasonableness the compilation of amounts to be disclosed, or considered for disclosure, in the financial statements. † c) â€Å"Inspect or confirm and obtain satisfaction concerning the transferability and value of collateral. † 5)The significance of Lincoln receiving nonrecourse notes rather than recourse notes as payment was very substantial.With a nonrecourse note the purchaser can simply and legally walk away from the transaction without being held accountable for the remaining balance even if the collateral does not exceed the value of defaulted amount. With nonrecourse notes, the value of the transaction can be grossly overestimated. As we seen in this case, Lincoln SL and the purchaser had predetermined that the balance of these transactions would never be paid in full. This method was used over and over by Lincoln, to give the appearance of large revenue gains. Due to these transactions by Lincoln SL, ACC was able to â€Å"withdraw huge sums of cash from the savings and loan in the form of intercompany dividend payments†. As the â€Å"purchasers† of the loans â€Å"defaulted†, Lincoln had to recognize the losses which it offset by conspiring additional nonrecourse transactions. This, as the case points out Lincoln would not have been able to maintain this cycle forever. 7)No, we do not think that Jack Atchison’s close relationship with Lincoln and Charles Keating prior to leaving Arthur Young was proper.As stated on page 91, â€Å"Atchison seemed to drop the auditors traditional stance of independence by repeatedly defended the practices of Lincoln†. They even called into question his actions as an outside auditor due to Mr. Atchison â€Å"becoming a proponent of the clients’ affairs†. Mr. Atchison was definitely a violation of the general standard #2 which states â€Å"The auditor must maintain independence (in fact and appearance) in mental attitude in all matters related to the audit. † AU section 220, which receives its guidance from SAS #1, covers this violation in more detail.Paragraph two states â€Å"he must be without bias with respect to the client since otherwise he would lack that impartiality necessary for the dependability of his findings†. It is obvious that he took a biased position and as such his ability to maintain independence vanished. Although Mr. Atchison did not receive any gifts or payments for his services for Lincoln, it does appear that he was more than compensated once he joined the company. After joining ACC, Atchison was no longer bond to follow the various auditing regulations. As such, technically he was allowed to interact with Young’s auditors.He also waited until after the audit was concluded to prevent any SEC violations. Ethically he probably should not have interfaced with Arthur Young’s auditors. But being that he had experience and personal relationships with Arthur Young, it would have been in ACC’s best interest (although deceitfully) to have him attempt to persuade the auditors to agree to ACC’s reporting methods. 9)If fraud is detected throughout the course of their work, than they have a responsibility to report it to the clients and their own management teams.However it is not the primary responsibility of the auditor to uncover fraud. As pointed out in AU 316 paragraph 4 â€Å"it is managements responsibility to †¦ detect fraud. † The auditor is there to give an independent opinion on the reliability of the financial statements. http://pcaobus. org/Standards/Auditing/Pages/AU316. aspx Factors that mitigate this responsibility to uncover fraud include properly planning of the audit, recording there work and maintaining good backup, having competent knowledge of the audit, keeping management up to date on progress and findings, having n understanding the internal controls and risks of the organization. Factors that compound these responsibilities can occur if the auditor fails to plan the work properly, doesn’t keep good records of the work completed, doesn’t have the necessary knowledge, obtaining too small of samples and doesn’t gain an understanding of the level of risk and the internal controls that are in place. AU section 110 and AU 230 go into more detail. AU section 110 covers the responsibilities and functions of an independent auditor.Within in it states that the auditor has a responsibility to â€Å"plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. † This section goes on to state that â€Å"the auditors responsibility for the financial statements he or she has audited is confined to the expression of his or her opinion on them. † http://pcaobus. org/Standards/Auditing/Pages/AU110. aspx Au section 230 discusses â€Å"due professional care in the performance of work†.This section discusses the need for the auditor to maintain a level of professional skepticism of management and the accounting entries. It also refers to the need of â€Å"due professional care that allows the auditor to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud†. Wherein, â€Å"the independent auditors objective is to obtain sufficient appropriate evidential matter to provide him or her with a reasonable basis for forming an opinion†. http://pcaobus. rg/Standards/Auditing/Pages/AU230. aspx The auditors of Arthur Young while not responsible to uncover fraud did not fully carry out their duties and responsibilities to provide an opinion that was clear of reasonable assurance. During the first two years of being Lincolns auditing firm, Arthur Young seemed to have employed auditors that did not have enough experience or fortitude to stand up to the management of Lincoln. Those auditors accepted questionable documents that corroborated the savings and loan’s real estate transactions. These documents were done by appraisers hired by the company. This should have raised a red flag do to the risk of collusion. The auditors should have probed deeper and conducted additional research to ensure the true value of the land. They also should have conducted a larger sample size to determine if all of the appraisals were conducted by the same firm. Arthur Young also failed to prevent one of their audits, Jack Atchison, the engagement partner from maintaining his independence from Lincoln.