Videos
KPMG
(LO 1, 2, 3)
KPMG LLP served as the external auditor for some of the largest sub-prime mortgage lenders in the U.S. leading up to and during the housing market crisis of the mid to late-2000s. The audits of two of their largest lending clients, New Century Financial Corporation and Countrywide, ultimately led the firm to settle litigation charges in 2010 for $44.7 and $24 million, respectively. The business model of these two subprime mortgage lenders consisted of providing loans to borrowers with weak credit histories. The business model had begun to fail during 2007, when the economy weakened, borrowers began defaulting, and home prices declined drastically. New Century filed for bankruptcy and Countrywide was purchased by Bank of America, which subsequently suffered massive losses related to business failures at Countrywide.
Just before the housing crash of 2007 put the companies in severe financial crises, KPMG had given both companies unqualified audit opinions. In both cases, KPMG was subsequently accused of violating professional standards, lacking independence, and being negligent. K PMG defended itself by arguing that its audits were not the cause of the financial woes at New century and Countrywide. Rather, the firm contended that the failed business model of the two companies led to investor losses.
a. How does the economic environment affect the litigation risk faced by audit firms?
b. Should auditors be held liable if their client’s business fails or if the financial statements contain a fraud that the auditors did not detect?
c. What defenses do auditors use in response to litigation?
d. What actions can auditors take to minimize litigation exposure?
Trending nowThis is a popular solution!
Chapter 4 Solutions
Bundle: Auditing: A Risk Based-Approach, Loose-leaf Version, 11th + MindTap Accounting, 1 term (6 months) Printed Access Card
- Nabais Corporation uses the weighted-average method in its process costing system. Operating data for the Lubricating Department for the month of October appear below: (Units Percent Complete with Respect to Conversion) Beginning work in process inventory 3,300 80%; Transferred in from the prior department during October 30,700; Completed and transferred to the next department during October 32,200; Ending work in process inventory 1,800 60% .What were the Lubricating Department's equivalent units of production for October?arrow_forwardGeneral Accountarrow_forwardFinancial accountingarrow_forward
- The following information is available for Remmers Corporation for 2010. 1. Depreciation reported on the tax return exceeded depreciation reported on the income statement by" $120,000. This difference will reverse in equal amounts of $30,000 over the years 2011-2014. 2. Interest received on municipal bonds was $10,000. 3. Rent collected in advance on January 1, 2010, totaled $60,000 for a 3-year period. Of this amount, $40,000 was reported as unearned at December 31, for book purposes. 4. The tax rates are 40% for 2010 and 35% for 2011 and subsequent years. 5. Income taxes of $320,000 are due per the tax return for 2010. 6. No deferred taxes existed at the beginning of 2010. Compute taxable income for 2010.arrow_forwardGiven correct answer general Accountingarrow_forwardCan you explore and give solution? its general account questionsarrow_forward
- Cost Account Question - man earned wages of $48,300, received $1300 in interest from a savings account, and contributed $3700 to a tax-deferred retirement plan. He was entitled to a personal exemption of $3400 and had deductions totaling $5010. Find his gross income, adjusted gross income, and taxable income.arrow_forwardI need this answer general Accountingarrow_forwardcost accountarrow_forward
Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage Learning
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
Auditing: A Risk Based-Approach to Conducting a Q...AccountingISBN:9781305080577Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:South-Western College PubBusiness Its Legal Ethical & Global EnvironmentAccountingISBN:9781305224414Author:JENNINGSPublisher:Cengage