Auditors' Contribution to Subprime Mortgage Crisis
What role did the accounting profession play in the recent subprime 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, McManus, Viele, 2008) The subprime mortgage crisis is the result of contract laws allowing lenders the securitization of subprime mortgage loans. Other causes of the subprime 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 subprime 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 complexities in loan transactions in which lenders intentionally complicated the lingo in the transactions. (Chunlin Leonhard 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 accurals. 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 (FASB) along with the
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, McManus, Viele, 2008) The subprime mortgage crisis is the result of contract laws allowing lenders the securitization of subprime mortgage loans. Other causes of the subprime 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 subprime 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 complexities in loan transactions in which lenders intentionally complicated the lingo in the transactions. (Chunlin Leonhard 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 accurals. 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 (FASB) along with the