Ernst & Young sued over Lehman's collapse

 

Ernst & Young sued over Lehman's collapse

Here is the big news that might trigger your interest as an auditor.

One of the Big 4 accounting firms, Ernst & Young is facing a civil lawsuit in the US over the collapse of Lehman Brothers! New York's state attorney Andrew Cumo claims that New York's state attorney Andrew Cuomo claims Ernst & Young "sat by silently" as Lehman Brothers tried to conceal billions of dollars in debt from investors before its implosion. The lawsuit says Lehman ran a "massive accounting fraud".

It is claimed that Ernst & Young approved of Lehman's increasingly frequent use of a device known as Repo 105. The lawsuit alleges: "These Repo 105 transactions had no independent business purpose and were designed solely to enable Lehman to manage the company's financial balance sheet metrics."

The case centres on Lehman's use of an accountancy practice known as Repo 105, which involves temporarily removing money from the balance sheet to give the impression of greater financial strength. Mr Cuomo mentioned that, Ernst & Young should not have approved the accounts, knowing that the practice had been used so widely.

The lawsuit seeks more than $150 million in fees that Ernst & Young received from 2001 to 2008 as Lehman's outside auditor,plus other unspecified damages

Ernst & Young has responded, and claims that the firm is going to "vigorously defend" the lawsuit. 

 

Hedge Fund Accounting Software

Hedge Fund Accounting Software

Disclaimer: this is not an advertorial thread

We came across a very powerful hedge fund accounting software, whereby all the computations are computed automatically, including analysis report, graph, charts, internal reporting purpose. The advanced technology avaialable in the market has resulted in the substantial change in the role of accountant, espeically fund accountant.

Hedge fund is a high-end area, where sophisticated accounting software have been developed to make the accounting process easier and faster. Imagine this: by inputing the details (e.g. share price), the reports, charts, entries are automatically generated.

However, a hedge accounting software should not disable a fund accountant ability to understand the concept, the journal entries, the accounting framework, and the relevant accounting standard, espeically IAS 39.

Auditing: Annual Budget vs Actual Results

Company prepare budget and use budget as a performance benchmark and monitoring tools. For instance, senior management can question sales department if their actual yeat-to-date entertainment has exceeded the budget before the end of the year. Budget is , usually, prepared and approved at the beginning of the year or before that.

Budget has incorporated management's forecast, estimation and outlook of the business in the coming times.

Is management's budget useful to auditor?

The answer is yes. Budget, which represents management's expectation, should be compared against the actual results. Significant variances should be investigated. Apparently, management would have to explain the variances. It's important for auditor to find out the reason of the variances to identify potential changes in business operation, significant developments during the year.

Understanding how management view the business (by looking at the budget) is a crucial stage in audit planning, it enhance our knowledge and understanding on the business, the industry and the overall economy as a whole.

Accounting Basics: Auditing operating

Auditing operating costs is always not an easy task. A good audit procedure requires auditor to develp a thorough understanding of the nature of the cost,determination of fixed / variable costs, understand the cost drivers of the costs (especially for variable costs),understand the linkage between the costs and the revenues.

Significant assertion of auditing an operating cost is to ensure that the cost recorded is complete (i.e. completeness).

First of all, we need to understand the nature of the costs (i.e. what type of costs, when was the costs incurred, is the individual amount incurred significant, etc). After develop the understanding of the nature of the costs, we need to understand whether the costs is a fixed costs, or variable costs.

Then, we need to understand the cost driver of the costs. This procedure is especially important for variable costs component. Auditor need to understand what are the factors that drive the cost (for instance, transportation cost could be significant to a trading house). The cost driver for transportation cost is the level of business activities / number of deliveries completed

Auditor can analyze the company's record on number of deliverties completed for the year, and compare our expectation to the cost variation. To illustrate, while number of deliveries go up, we will expect total transportation cost to increase. A good understanding of the cost drivers allow the auditor to have complete understanding of the costs/ and develop a good audit approach to analyze the cost variation

Accounting Basics: Businessperson

As a retired businessperson I always find it odd that freelance writers who've never had to make a payroll in their lives, other than paying their own living expenses seem to think it's okay for them to write on small business topics as if they are experts. There is a big difference between being a freelance writer and running a small business in the real world. Yes it's true that most freelance writers can spin a phrase, and most of the articles are topics of interest.
Still, I find some of the nonsense which is purported in some of these filler articles a little more than I can stomach. The advice is not all that good and they often miss the point and in doing so show just how little they really know about the subject. Not long ago I read an interesting article in the small business section of the Wall Street Journal titled; "Study Finds Certified Financial Statements Help Businesses Loan Prospects" by Angus Loten published on January 13, 2011.
What the article did not explain was whereas it would help a small business to have audited financial statements when they go to seek a loan to expand their business, "BUT" the reality is they need to take out a loan to get the audit in the first place. Ever since Sarbanes-Oxley the cost to get an audit has skyrocketed, and is well over four times the cost as it was before that law was in place. Worse there are even new financial laws now which will make things even tougher.
Often, I wonder if this Sarbanes-Oxley rules were actually written by accountants, or if Senator Sarbanes and Senator Oxley had relatives that were CPAs or accountants. After all, why on Earth would they create such an onerous set of regulations which would stifle the entire business community regardless of industry? Now the cost of 'errors and omissions insurance' has skyrocketed for accountants, and very few firms want to do audits. Meanwhile most CPAs and accountants are so busy, they don't wish to take the work or do peer reviews.
The whole thing is nothing less than a nightmare. The article tries to put some numbers to all these factors, and show that in the end the lower interest rate payments, and the loan itself will keep the small businesses in business, therefore it's worth the cost to get certified financial statements. In some cases this may be true, but if the cost of borrowing money is so expensive, and you have to pay professionals which are gatekeepers to that money, it becomes unviable, and a very uninviting prospect to say the least.
Needless to say, I know a thing or two about all this, since I'm retired franchisor. And with that said I'd like to remind you to be very careful what you read when looking through small business filler articles no matter what publication the article resides in. Indeed, I hope you will please consider this. If you have any comments or questions you may e-mail me and we can talk.

Article Source: http://EzineArticles.com/5826882

Examples of accounting

Examples of accounting services include services provided by accounts payable employees, accounts receivable employees, staff accountants, and the accounting manager or controller. Some specific services performed by these individuals include keying invoice information into an accounting program, processing timely payment of invoices, recording receipt of payment for products sold, reconciling inventory usage and receipts, and creating financial statements. Examples of auditing services include services performed by the internal audit staff and the external audit company, usually a CPA firm. Some specific services performed by these individuals include determining the reliability and credibility of accounting reports and financial statements, and assessing risk control in various areas.

Examples of assurance services include services performed by the external audit company. Some specific services performed by these individuals include determining the relevance and timeliness of accounting reports and financial statements, and reviewing company internal controls to assess the effectiveness of those controls. As previously mentioned, assurance services may or may not be associated with financial information. Assurance services that are associated with financial information include auditing internal controls or reviewing historical financial statements. Assurance services that are not associated with financial information include Nielsen television ratings and information about businesses that is provided by the Better Business Bureau.

Definitions Accounting

Definitions

Accounting services can be defined as the preparation and analysis of financial information which is reported to internal and external users via financial statements. Auditing services involve evaluating the reliability and credibility of financial information, as well as "the systems and processes responsible for recording and summarizing that information" (Messier, Jr., Glover, & Prawitt, 2006, p. 5-6). Assurance services can be defined as independent professional services that evaluate the reliability, credibility, relevance, and timeliness of information in order to improve the quality of information for decision makers (Messier, Jr. et al., 2006, p. 15). Assurance services may or may not be associated with financial information.

 

Relationship

The relationship between accounting and auditing can be compared to the relationship between an author and editor. Like the author, the accountant creates the material, in this case financial statements and reports. Like the editor, the auditor examines the material and suggests changes and corrections that must be made in order to meet the reliability and credibility requirements specified by the company and outside agencies, such as the Financial Accounting Standards Board (FASB). Assurance services take things one step further by examining the material to insure it meets relevance and timeliness requirements.