Crisis Impact on Sustainability Reporting

Question: Discuss about the Crisis Impact on Sustainability Reporting. Answer: Introduction This study aims to identify the actual liabilities of the auditors in the current as well as past business context. In the beginning, the study focuses on the liabilities of the auditors in the general context. After that, the discussion in the study moves towards the liabilities that the auditors in the business organizations had during the global financial crisis. During the discussion, special emphasis is made on the incident of Lehman Brothers collapse during the global financial crisis in 2008. Critical analysis is made on the situation in order to identify the issues or loopholes that the auditors must avoid during auditing. Discussing on the concept of auditors liability In the words of Hall, Judd and Sunder (2016), the auditors in a business organization are liable for the providing the assurance that the financial and other operational information provided by the organization are true and fair. At the same time, the auditors of the companies are also liable to prevent any kind of financial fraud within the companies. The financial experts says that auditing is the essential work, which provides the assurance that the financial reports of the companies are disclosing true and fair view of the companies financial positions. Whittle, Mueller and Carter (2016) noted an auditor must be completely aware of the liabilities of detecting the financial frauds and mistakes in the financial reports of the firms. An auditor is liable for conducting mainly two types of audits internal audit and statutory audit. Though, in these two types of audits, the liabilities of the auditors are not different. In the internal audit, the auditors liability is to investigate or check the financial and operational documents and reports of the particular departments in the organization. The internal audit can be divided into three sub-categories product audit, process audit and system audit (Chen, Krishnan and Yu 2016). In case of product audit, the auditors check whether the products of the company are as per the required quality or not. In the process audit, the auditors check the operational process within the organization and in case of the system audit, the auditing is done on the management system. On the other side, in case of the statutory audit, the auditors are liable to check the financial reports and other operational documents of the company at the end of the financial year (Geiger, Raghunandan and Riccardi 2013). The statutory audit can be done on periodic basis. According to Antonia Garca-Benau, Sierra-Garcia and Zorio (2013), auditing is one of the most important activities for the business organization. Hence, the liability of the auditor is huge in case of maintaining the sustainability of the organizations. General liabilities of the auditors According to Sikka (2015), an auditor is liable for planning and executing the audit program in order to identify whether the financial statements presented by the company includes any misinterpretation or not. The auditor is also liable for providing personal opinion regarding the financial position and reporting standards of the company. Many times people think that fraud detection is the only liability that auditors have, but in actual sense auditors have many other responsibilities or liabilities like, identifying the risks involved in the financial statements or reports of the company, providing the guidance to the companies regarding the accounting techniques and expressing their views regarding the financial position of the company (Geiger, Raghunandan and Riccardi 2013). An auditor is liable for conducting different kinds of activities. In order to perform the proper auditing, the auditors must take care of the following liabilities: An auditor is one of the most liable persons for maintaining the transparency level in the financial reporting of the company. The auditors must investigate about the organization and its business activities by asking several questions to the employees and management personnel of the company. At the same time, the auditors are also liable for understanding the internal control system of the company through proper investigation (Hall, Judd and Sunder 2016). It is the liability of the auditors to perform an examination in order to verify each transaction took place within the company in a particular financial year. Along with the financial statements, the auditors are also responsible for testing the other documents related to the other business activities of the company. The auditors also require examining the supporting documents for financial reports or statements (Ntim, Lindop and Thomas 2013). The auditors of a company are also liable for confirming the reliability of each of the ledger accounts in the financial records of the company. Therefore, from the above discussion, it can be said that therefore several activities for which the auditors of the companies are liable. The above mentioned responsibilities make the job of auditing critical but it helps providing proper assurance to the company regarding their financial position in a financial year. Global financial crisis and auditors liability In the above discussion, it has been identified that in a business organization, the auditors have huge liability and the future of the business depends on the extent to which the auditors are aware of their liabilities. However, in this context Sikka (2015) stated that the business organizations may face several problems if the auditors do not play active role in the field of auditing. If the incident of global financial crisis in 2008 is considered, then it can be identified that many financial experts have stated that the big audit firms like, KPMG, PWC and Deloitte were responsible for the global financial crisis. In the words of Garca-Benau, Sierra-Garcia and Zorio (2013), the big audit firms played their role within the legal boundary but that was not up to the standard or as per the requirements. In support of this, Ntim, Lindop and Thomas (2013) noted that the global financial crisis took place because of weak communication between the large audit firms. The audit firms, which were responsible for the audit in banks, did not share important information regarding the financial positions of the banks in UK. On the contrary, Geiger, Raghunandan and Riccardi (2013) commented that auditors were not primarily responsible for the global financial crisis or financial crisis in the banks in UK and USA. The financial crisis primarily took place because of the wrong decisions taken by the banks regarding the lending and investing, wrong understanding regarding the risk factors and wrong credit rating system. Though the auditing firms or the auditors were not primarily responsible for the global financial crisis, still it cannot be said that the auditors played their role actively. After the global financial crisis in 2008, the head of PwC, US stated that the auditors of the companies before the financial crisis should have guided the companies regarding the improvements of the financial reporting. At the same time, Geiger, Raghunandan and Riccardi (2013) mentioned that before the financial crisis, the auditors also showed less effort on analyzing the valuations techniques applied by the banks and other large financial organizations. Before the financial crisis, the large banks in US and UK held huge amount of questionable assets like, collateralized obligations on the balance sheet or mortgage-backed securities. However, the auditors did not bother to check those questionable assets and their valuation techniques and guide the banks in order to improve their actual financial positions (Chen, Krishnan and Yu 2016). In the investigation after the global financial crisis, it has been identified that during the crisis period, most of the banks and other financial institutions valued their assets as per their own models. Though the banks and financial institutions were audited by the same audit firm, the audit firm did not mention anything about the differences in the assets valuation models of the organizations. For example, Goldman and AIG both valued their assets in their own assets valuation models and faced huge losses during the crisis. These two organizations were audited by the same audit firm that is PwC, bu t PwC did not mention that two firms were following different assets valuation models (Ft.com 2017). Therefore, the above discussion is indicating that in the legal sense, the job of the audit firm was proper during the financial crisis but technically the job done by the audit firms had loopholes. These loopholes in the activities of the audit firms took place because of the negligence. The negligence of the audit firms influenced the global financial crisis to high extent. The situation can be better understood if the case of any particular company during the crisis period is considered. Below, the analysis is done based on the particular case of Lehman Brothers collapse during the period of global financial crisis. Analyzing the liability of auditors in the collapse of Lehman Brothers In the above discussion, it has been identified that the negligence of the auditors was one of the major reasons behind the global financial crisis. If the particular case of Lehman Brothers is considered, then it can be identified that the auditor of Lehman Brothers was Ernst Young. After the collapse of Lehman Brothers, it has been argued by many financial analysts or experts that Ernst Young has not shown proper professionalism while auditing the financial reports of Lehman Brothers. However, in this context, Wiggins, Bennett and Metrick (2014) stated that before the global financial crisis, it was approved by the government that auditors of any firm will have limited liabilities. The audit firms were engaged with the organizations as per the LLP law. This particular law allowed the audit firms taking the liability of their client firms only to certain extent. Jones and Presley (2013) commented that the limited liability partnership actually influenced the negligence of the audit firms. In the investigation, it was identified that the financial interpretation done by Lehman Brothers was not proper. However, Ernst Young failed rather neglected this factor. At the same time, Kershaw and Moorhead (2013) noted that the structure of the business activities of the company was much complex as well as low standard, but the audit firm that is Ernst Young did not suggest anything to the company. Wiggins and Metrick (2014) argued that Lehman Brothers showed healthier financial position by misinterpreting the financial statement. This was not a tough job for Ernst Young identifying the factor that the financial statements of Lehman Brothers were misinterpreted. Wiggins, Piontek and Metrick (2014) commented that the tactics applied by Lehman Brother to hide their actual financial position were known to Ernst Young, but the audit firm did not bother to investigate further on the financial reporting standards applied by Lehman Brother. Due to this, the Repo 105 used by the firm was not disclosed. However, Mahon (2015) mentioned that it is not right to consider Ernst Young responsible for the collapse of Lehman Brothers because the audit firm that is Ernst Young checked the financial reporting of Lehman Brothers and it was identified by the firm that Lehman Brothers prepared and presented by financial reports as per the rules and regulations in GAAP (Generally Accepted Account ing Principles) (The Guardian 2017). However, on the contrary, Lubben and Woo (2014) stated that certain reduction in the gearing ratio of Lehman Brothers by 0.9 should have captured the attention of Ernst Young regarding the financial reporting of the company. In support of this, Presley and Jones (2014) noted that no questions were raised from the end of Ernst Young regarding the sudden change in the gearing ratio of the company. At the same time, Gottschalk (2015) suggested that the regulatory framework in the country in respect to accounting and finance was much weak, which created the scope of doing financial fraudulence by different large financial and other institutions or organizations. In the analysis of the particular case of Lehman Brothers collapse, it can be said that the audit firm or Ernst Young performed their job without taking any actual responsibility. The overall aim of auditing was not met by Ernst Young. After auditing, it is the duty of the auditors to provide their opinion regarding the financial reporting and financial statements of the company (Nguyen 2016). The auditor can provide the opinion only after checking each document of the company carefully. However, after the collapse of Lehman Brothers and global financial crisis, it has been mentioned by the governments of different countries that while auditing the financial statements and reports of any company, it is the duty of the auditors to check each transaction in detail. The responsibility of the auditors is not limited to the certain extent. It is possible that though the companies have followed the rules and regulations stated under GAAP, there are misinterpretations or manipulation of t he financial statements (Lwaltd.com 2017). Therefore, it is the responsibility of the auditors to provide their opinion after checking the financial information of the company thoroughly. Therefore, from the above discussion, it can be said that the audit company Ernst Young was partially liable for the collapse of Lehman Brothers. Ernst Young did not fulfill the requirements of auditing properly. If the auditor would have done critical examination of the financial statements of Lehman Brothers, then it could identify the financial misstatements or manipulations done by the company. This particular case of Lehman Brothers indicates that the responsibility of the auditors is not limited; the auditors are responsible for each financial activity done by the client company. Conclusion: In this study, it has been identified that an auditor has huge liabilities. The liability of the auditor is not limited to fraud detection; the auditor is liable for maintaining strong internal control system and at the same time providing best financial suggestions to the company. During the discussion, the study has identified that there are mainly two types of audit that the auditors generally do statutory audit and internal audit. The study has also indicated that the liability of the auditor is not different in case of statutory audit and internal audit. The study has also identified several general liabilities of auditors and some of those liabilities or responsibilities are detecting the financial frauds or misstatements in the financial statements of the company, checking the internal control system of the company and suggesting the company proper financial reporting standards. At the same time, the study has also identified that auditors were liable for the global financial crisis during 2008. The study has found out that in case of Lehman Brothers collapse, the audit firm of the company that is Ernst Young was partially responsible. This is because the Ernst Young did not check properly the financial statements or reporting of the company. There were several signs, which were indicating the manipulations in the financial statement; however, Ernst Young ignored those. Recommendations: The above discussions in the study provide the following recommendations: Every audit firm must conduct critical analysis of each of the transaction taken place in the client company. The audit firm must raise questions to the management of the client company if any suspicious or unusual thing happens or noted in the financial statements. The audit firm must check the assets valuation model of each client company. Reference list: Antonia Garca-Benau, M., Sierra-Garcia, L. and Zorio, A., 2013. Financial crisis impact on sustainability reporting.Management decision,51(7), pp.1528-1542. Chen, L., Krishnan, G.V. and Yu, W., 2016. The Relation between Audit Fee Cuts during the Global Financial Crisis and Earnings Quality and Audit Quality. Ft.com. 2017. [online] Available at: https:///www.ft.com [Accessed 17 Jan. 2017]. Geiger, M.A., Raghunandan, K. and Riccardi, W., 2013. 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