Why Do Audits Fail Evidence from Lincoln Savings and Loan

An implicit theme of this case that I want students to recognize is the contrast between the persistent and vigorous efforts of David Sokol to “get to the bottom” of the suspicious items he uncovered in JWP’s accounting records versus what Judge William Conner referred to as the “spinelessness” of JWP’s auditors. The JWP audits were similar to most problem audits in that the auditors encountered numerous red flags and questionable entries in the client’s accounting records but, for whatever reason, apparently failed to thoroughly investigate those items. On the other hand, Sokol refused to be deterred in his investigation of the troubling accounting issues that he discovered. The relationships that existed between members of JWP’s accounting staff and the Ernst & Young audit team apparently influenced the outcome of the JWP audits. Of course, the Sarbanes-Oxley Act of 2002

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This research paper is being submitted on March 10, 2013, for Tiffany Krogman, A340/ACG3085 Section 03, Advanced Auditing Concepts & Standards.

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They are not legally bound to investigate; however, it only makes sense to investigate to ensure there is no impropriety. This report helps the auditors to dig deeper into the information concerning the Repo 105 transactions.

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As a way of increasing awareness of possible fraud, SAS No. 82 - “Consideration of Fraud in a Financial Statement Audit”, was issued in 1997 (Riahi-Belkaoui, and Picur 34). This SAS does not modify the basic ARM, but it expands on the guidance for the auditor’s consideration of material fraud in conducting financial statement audits. The SAS increases an auditor’s ability to detect fraud in an organization.

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