Auditors’ Contribution to Subprime Mortgage Crisis
What role did the accounting profession play In the recent supreme mortgage crisis? What could they have done differently? An Independent auditor has a duty is to: Identify, measure. And communicate financial information about an entity for decision making purposes. They are also responsible for generating the financial statements/reports for an organization. (Marshall, Unmans, Vile, 2008) The supreme mortgage crisis is the result of contract laws allowing lenders the characterization of supreme mortgage loans.
Other causes of the supreme mortgage crisis were poor decisions made in terms of operating investments and finance. Risks were managed poorly, and fraud occurred in some instances. Due to the construct of supreme loans and its impact on borrowers, I. E. , lenders offering small down payments with cost deferral features, high loan to value ratios, and escalating payments, borrowers underestimated the true cost of the loan and were deceived by the completes In loan transactions In which lenders Intentionally complicated the lingo In the transactions.
Channel Leonard 2012) Borrowers took advantage of the fact that lenders would make an extensive effort to pay their mortgage bills, however, when they couldn’t due to medical bills, company downsizes, etc… This led to accountants having to maneuver through transactions in an effort to determine fair value measurements; ultimately making inaccurate estimations based on an illiquid market. This led to oversights in fair value accounting and lost accruals. For an independent auditor, it is most important to provide users with the most accurate financial information.
When they cannot, it seems as fraudulent practices have occurred, whether intentional or inadvertent. Consequently, due to investigations by the Securities and Exchange Commission on unethical practices discovered at some firms, along with Issues and concerns of other firms, the Financial Accounting Standards Board (FAST) along with the Public Committee of Accounting Oversight Board (PEPCO), offered guidance for auditing processes Involving fair values measurements.
Issues continued to persist, which led to the PEPCO performing financial audits on the financial statements devised by auditors at varying firms due to delinquencies in the auditing process for fair value measurements, financial estimates, adequacy of disclosures, and the ability of the auditor to continue the audit. According to the Chief Accountant for the Securities and Exchange Commission, auditors were warned of the financial risk areas but many were not providing accurate information or following the committees’ guidance.
Auditors didn’t comply with the SEC’s current standards and rules which led to improper auditing, fraudulent, and Inadequate financial reporting. (Kroger 2011) In conclusion, there were some auditing firms that operated using dishonest practices. Having said this, I do not believe all accountants were at fault nor can be blamed for the supreme mortgage crisis due to the lack of exactness when making fair value measurements, along with accountants’ inability to predict the future. They have received all documentation of the entity transactions.
In order to prevent the blame in its entirety being placed on accountants, it would have been wise of the accountants to regularly check for revisions in the guidance offered by the SEC as updates of how to manage potential issues occurred. The SEC was aware of many issues and published documents to guide auditors for handling potential problems with fair value estimations. (Kroger 2011) Implementation of those suggestions would have helped curb issues when auditing fair value measurements of entities. Kroger, J. (2011, April 6).
