Accounting Research Center, Booth School of Business, University of Chicago
Why Do Audits Fail? Evidence from Lincoln Savings and Loan
Author(s): Merle Erickson, Brian W. Mayhew, William L. Felix, Jr. Reviewed work(s):
Source: Journal of Accounting Research, Vol. 38, No. 1 (Spring, 2000), pp. 165-194 Published by: Blackwell Publishing on behalf of Accounting Research Center, Booth School of Business, University of Chicago
Stable URL: http://www.jstor.org/stable/2672927 .
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Journal of AccountingResearch
Vol. 38 No. 1 Spring 2000
Printed in US.A.
Why Do Audits Fail? Evidence
from Lincoln Savings and Loan
BRIAN W. MAYHEWt
This study describes and critiques the audit procedures applied to a set of material transactions from the Lincoln Savings and Loan (LSL) audit failure.' Auditor deposition testimony and audit working papers produced in the civil litigation against the auditors of LSL provide the basis for this analysis. We propose alternative procedures, based on information available to the auditors at the time of the audit, that might have prevented the audit failure. Other research methods have provided only very limited evidence on the important question of why audits fail. The following detailed analysis of LSL suggests potential reasons for audit failures, particularly in cases involving management fraud. This research also provides a starting point for future research to evaluate the tUniversity of Arizona.
*University of Chicago; tUniversity of Wisconsin-Madison;
This paper was previously titled "Understanding the Client's Business: Lessons from Lincoln Savings and Loan." We appreciate the suggestions of Neil Fargher, Audrey Gramling, Pia Montoya, Dana Northcut, Zoe Vonna Palmrose, Brian Shapiro, Marshall Vest, Mark Zimbelman, and workshop participants at the University of Arizona and the Twelfth University of Illinois Symposium on Auditing Research for their comments on earlier drafts of this paper. We are especially grateful to three anonymous reviewers for numerous comments and suggestions. The first author gratefully acknowledges the financial support of the University of Chicago Graduate School of Business.
'We describe the 1987 audit of LSL as an "audit failure" because, in our view, the audit procedures used were insufficient and resulted in the issuance of financial statements not in accordance with GAAP It is important to note that, as described in following material, the court did not reach a conclusion on the audits of LSL. All of LSL's auditors settled before the court reached any final judgments.
Copyright(?, Instituteof ProfessionalAccounting, 2000
conclusions reached here using more controlled settings or larger data sets. In addition, our analysis may supply information useful to standard setters (Schipper ).
The public availability of the deposition testimony and audit working papers creates a unique opportunity to study and evaluate audit procedures and decisions from an audit failure. To date, evaluating actual audit procedures from an audit failure has proved nearly impossible for...
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