The current global financial crisis of 2007 has been considered as worst financial crisis and is also considered as the Great Depression of 1930. The shortfall in liquidity in the banking system of United States has been the major cause for global financial crisis. The end of housing market plays an important role in the failure of the key businesses and also for the decline of wealth of the consumers (Windsor and Warming-Rasmussen, 2009). The favourable tax policies and bailouts are the main reason for the failure of the financial segment of the society which leads to the advent of financial crisis. The economists have argued on the role that the accountant played which lead to financial crisis. The role of auditors has been in the spotlight for justifying the cause of financial crisis (Dunphy, 2009). The lack of transparency in financial statements had also given rise to a lot of problems in auditing. It has been noticed that many banks have collapsed due to their weak financial audit system. It is evident that the financial auditors are involved in preventing the financial crisis but there role were questioned. It can be however exclaimed that if there had been no auditors then the condition of financial crisis would have been worse. The paper explains whether the auditors are to be blamed for the financial crisis. It is evident that auditing is an important function to mitigate the impact of current financial crisis. Auditing is the main responsibility of the auditors and if they fail to fulfil their responsibility then huge problem arises regarding the transparency of the financial statements (Yahoo Finance, 2009).
Accounting is basically responsible for delivering appropriate information that is needed to make right decisions. Accounting also concentrates in disseminating high quality information that company with the accounting standard that are created by the setters. The auditors have struggled to comply with the standards that are evolving with the trends in the financial markets. When the financial crisis came into spotlight, the fair value accounting has been under the scrutiny of the higher authority. There had been an argument among the critics that the whole problem aroused due to the inefficient fair value accounting. It is known that the fair value accounting is transparent in any company. However, the main problem lies in the standards that refer that the investors are not disclosed with the necessary facts. It is observed that the officers who are responsible for the disclosure of the facts do not deliver the information to the investors through the financial statements that are present in the annual reports. Later it is observed that the auditors are blamed for not going through the financial statement properly. Thus, it can be said that the auditors are not always to be blamed since they are not responsible for developing the financial statements. The accountants and analysts are responsible for the miscommunication of the data to the investors (EBSCO, 1997).
Auditors have a pivotal and also a controversial role in the occurrence of the recent financial crisis of 2008. They are panned by the common people since they failed to detect the risks and the misstatements that are present in the financial statement of some big companies. The auditors used the audit risk model to gauge the ricks that are associated with the financial statement of their clients. The model is used as a guide for the audit planning process. The breakdown of the assessments of the auditors is recognized in the process of auditing (Rapoport, 2010). The practitioners employ the model for planning an efficient and effective audit. The model explains inherent risk, which denotes the probability of material misstatement before the effectiveness of control system is considered (Summon, 2011). An example of inherent risk can be cited as the risk in evaluating the accounts receivable since the payment of the doubtful accounts is biased and the accounts are estimated. The account for cash and cash equivalents posses’ lower inherent risk since there is no estimation and thus is less vulnerable for manipulation. The risk is thus controlled and detected after a certain period of time by the internal control system. A company which does not have an adequate documentation system are prone to higher risk. This type of risk which the company is exposed to is called the control risk. Both the risks exist before the audit process is generated. The risks are thus out of the auditor’s control and are referred to as they are out of auditor’s control and are referred as audite risk. The detection risk is the level of risk that can be tolerated during the auditing process for detecting material misstatements (Ashbaugh, LaFond and Mayhew, 2003). Suppression of audit risk to certain level requires auditors to adjust the level of tolerable risk according to the estimate of control risk and inherent risk of client. If the inherent and control risk of a company increase during financial crisis period the auditors has the ability to lower the level of tolerance of the risk so that the company can avoid future failures and also lower the risk arising from audit. To decrease the detection risk in investments audit efforts are required. Auditors require increased personnel who develop detailed report in the risk and test larger samples for lowering the risk of audit (ACCA, 2012).
It is observed in 2010, civil fraud charges were levied on Ernst & Young LLP for the role they played for the download of Lehman Brothers Holdings Inc.