The responsibility of the auditors is to provide a clear picture of the company i.e. prevention, detection, fraud reporting, an illegal practice and errors in the company. This has been the most controversial issues due to the collapse of big and Small Corporation across the globe. The Big financial scandals such as Enron-2001, WorldCom,-2002, HealthSouth-2003and Bernie Madoff -2008 so on.
Current Audit Report and Financial Crises/Banking Crisis
Auditors have played an important role during financial and banking crisis. As we know that the main reason for financial crisis was bursting of the housing bubble. During 1997-2006, American houses prices increased by 124% and people who never dream of affording o house was purchasing houses through mortgage loans. For making the situation worse, mortgage brokers were giving loans for mortgages and to the ones which do not had any guarantee or collateral with them i.e. they had unstable source of income (Graham, Rodda, 2011, p. 7).
Hence, as these people were unable to recover the loans, these loans were transfers to the banks in order to resell them to other investors. As a result, housing prices reduced and hence, un-qualified borrowers defaulted on their mortgages. This sequence of events has result the descending spiral in the mortgage value which was related to the assets and this value further reduced (Graham, Rodda, 2011, p. 15).
In addition, FASB has released FAS.157 in which fair value definition has been given. This was done to develop a frame-work in order to measure value of the asset are fair value, further stated in General Accepted Accounting Principle - GAAP and further to expand disclosures concerning the measurements of fair value (IFAC, 2011, p. 17).
Before this, there were their numerous conflicting definitions regarding Fair Value and modest directions were given for application. Through the development of this statement, FASB required to enhance the comparability & consistency in measurement of fair value and to expand the disclosure concerning measurement of affair value. FAS.157 refers to the Fair Value as price of an asset at time of selling- market price i.e. an exit price and not to price of an asset at time of acquiring i.e. an entry price. FAS.157 definition of fair value also stress that Fair Value is Market Based instead of measurement of entity specific. This accounting measurement method intensities the collapse of the financial and economic system of country by further rooting the death spiral where the mortgage value decline (Protiviti, 2010, 16).
Beside this, the cancellation of Glass-Steagall Act of 1933 contributed towards the elimination of the Wall Street investment banks and depository banks was separated. The enhancement of leniency by the government placed auditors' responsibility for detecting and preventing any potential fraud. In short, the authority and the responsibilities were passed from regulators to auditors of the company and in various cases it was scapegoat. Many economists have attributed the financial and banking crisis to fragile financial audits (KPMG, 2006, ...