Case 1.7 Lincoln Savings and Loan Essay example

1741 Words Jul 7th, 2011 7 Pages
Cas 1) The substance-over-form concept is explained by accountingtools.com as a concept in which “the information shown in the financial statements and accompanying disclosures of a business should reflect the underlying realities of accounting transactions, rather than the legal form in which they appear.” They go on to explain that the main point of the concept is that “a transaction should not be recorded in such a manner as to hide the true intent of the transaction.” The concept requires or assumes that someone is attempting to deliberately hide a transaction as one that meets GAAP standards although in reality the transaction would affect the financial statements differently than reported. This form of deceit was used over and …show more content…
With nonrecourse notes, the value of the transaction can be grossly overestimated. As we seen in this case, Lincoln S&L and the purchaser had predetermined that the balance of these transactions would never be paid in full. This method was used over and over by Lincoln, to give the appearance of large revenue gains. Due to these transactions by Lincoln S&L, ACC was able to “withdraw huge sums of cash from the savings and loan in the form of intercompany dividend payments”. As the “purchasers” of the loans “defaulted”, Lincoln had to recognize the losses which it offset by conspiring additional nonrecourse transactions. This, as the case points out Lincoln would not have been able to maintain this cycle forever.
7) No, we do not think that Jack Atchison’s close relationship with Lincoln and Charles Keating prior to leaving Arthur Young was proper. As stated on page 91, “Atchison seemed to drop the auditors traditional stance of independence by repeatedly defended the practices of Lincoln”. They even called into question his actions as an outside auditor due to Mr. Atchison “becoming a proponent of the clients’ affairs”. Mr. Atchison was definitely a violation of the general standard #2 which states “The auditor must maintain independence (in fact and appearance) in mental attitude in all matters related to the audit.” AU section 220, which receives its guidance from SAS #1,
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