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Friday, September 13, 2019

The analysis of EC Proposals and the Statutory Audit Essay

The analysis of EC Proposals and the Statutory Audit - Essay Example Blame was levied at rating agencies, directors of companies in the financial system and their regulatory agencies, as well as accounting and auditing professionals. This led to a number of regulatory responses that were aimed at strengthening controls over the operations of financial institutions and enhancing financial reporting. These responses have not only been limited to governments in the countries affected but to various bodies including standard setters for the accounting and auditing profession. Te European Commission (EC) which gives directives to 27 countries, made two proposals that could result in major changes in the auditing statutory audits and the audit of PIEs. They are aimed at the professionals whose opinion adds credibility to financial statements as well as supervisors of PIEs. Additionally, there was the Basle lll Accord which amended the capital requirements for financial institutions. Since then auditors have been required to provide more comfort to investors by carrying out additional procedures that would enhance financial reporting. Audit committees have also been challenged to provide the necessary support to ensure compliance. This paper provides information on the background to the financial crisis and the audited accounts of financial institutions. ... 2.0 Background to the financial crisis Several factors worked together to generate the crisis in the financial markets across the world since 2007. Jickling (2010) points out that there were multiple causes to the crisis as reflected in the policy responses taken in the US. One of these was the existing and anticipated credit losses on mortgages in the United States (Ellis 2010). These mortgages were made available to persons who would not have been able to obtain them under normal circumstances. The lowering of standards allowed them to obtain mortgages at relatively low rates so that they could own their own homes. However, one drawback was that the rates were adjustable. Therefore, persons who might have been able to repay in the initial stages soon found out that they could no longer service their mortgages. This coupled with the oversupply of houses on the market resulted in a reduction in their house values and therefore the values of the security for mortgage loans. In some ca ses the value of the houses was worth less than the loan balance and so homeowners ended up with negative equity. Therefore, there were no tangible benefits to be gained from holding on to properties that were not worth the amounts owed. A large number of homeowners defaulted on their mortgages and so it had a ripple effect which impacted the global financial system. Murphy (2008) referred to this as imprudent mortgage lending which caused a terrible shock to the financial system. Murphy (2008) also indicated that although imprudent lending paid a role, its role was not very significant. Another factor blamed for the crisis was global imbalances. Smaghi (2008) indicates that this is characterised by some countries like China and Germany having large surpluses

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