The Work of the Auditors in the Case of Lincoln Savings and Loan Essay

Introduction

The world of business lives according to its rules and laws, and there are certain periods, usually connected with inflation and financial instability when such important aspects of the business as audit face the necessity of reforming and restructuring. The current paper considers the case study of one of the numerous savings and loans (S&Ls) in the United States in the 1980s. The research of the Lincoln Savings and Loan Company allows a better understanding of the audit practices used in business on the whole and real estate transactions in particular. The major focus of this paper is the critical analysis of the audit procedures that Lincoln Savings and Loan applied in its business relations with Wescon and Emerald Homes companies.

Analysis of Auditing Procedures

Description

Thus, when dealing with Wescon, Lincoln Savings and Loan auditors relied on their knowledge of SFAS 66 requirements and studied the company’s documents for conformance to the above requirements and the possibility for the full profit recognition of the Wescon transaction. As well, the auditors studied the Wescon transaction’s structure and concluded that the down payment of 25% conforms to SFAS standards and respectively the transaction’s profit can be fully recognized (Erickson, Mayhew, Felix, 1999, p. 15). The auditing of the Emerald Homes transaction involved the combination of the EITF 86-29 and SAFS 66 criteria applied to the transaction, its terms, down payment share, and the investigation of the possibility of the transaction financing by EH (Erickson, Mayhew, Felix, 1999, pp. 15 – 16).

Critical Analysis

At first sight, the auditing procedures used by Lincoln Savings and Loan auditors rise no controversy and seem to be proper, but a more detailed consideration leads the analysis into doubts about the actuality of the claims made by the sides that allegedly illegally participated in Wescon’s and Emerald Homes’ transaction financing. In other words, what differs the procedures implemented by Lincoln Savings and Loan auditors from the traditional auditing is their belief in the above-mentioned possible financers without actual checking of the transactions’ history and tracing of the funding flows in and out Wescon and Emerald Homes. Thus, apart from the evident proper structure of the auditing procedures used, the lack of investigation and excessive reliance upon the companies’ confirmations is the main weakness of the Lincoln Savings and Loan auditing process.

LSL Auditors’ Evidence

Description

The evidence that Lincoln Savings and Loan auditors managed to collect during their auditing procedures applied to Wescon and Emerald Homes include the transactions’ volumes, their down payment shares, the sources of financing, the transactions’ eligibility for profit and revenue recognition, and compliance with SAFS 66 and EITF 86-29 requirements. In more detail, the Wescon transaction’s value was $14 million, while the down payment amounted to $3.5 million which conforms to the SAFS 66 requirement of at least 25% down payment for real estate transactions. The auditors also found out that the payment term was less than 20 years and that the $20 million loans associated with the Wesson transaction were not intended for the down payment financing (Erickson, Mayhew, Felix, 1999, p. 15). As for the Emerald Homes transaction, the auditors managed to determine that the total transaction volume was $26.1 million, while the down payment requirement provided by criteria SAFS 66 and EITF 86-29, i. e. 25%, was also complied with in the form of a $6.5 million share. The terms of the transaction also included the necessity for payment to be carried out in less than 20 years. Finally, the Lincoln Savings and Loan auditors stated that the $25 million loans for the transaction involving EH and AMCOR were not related to the audited Emerald Homes transaction (Erickson, Mayhew, Felix, 1999, pp. 15 – 16).

Evaluation of the LSL Auditors’ Evidence

The evidence gathered by the Lincoln Savings and Loan auditors can be characterized dually. On the one hand, the auditors managed to get the precise figures describing the transactions’ volumes and structures, down payments, and payment terms. On the other hand, these numerical data are likely to be incomplete while the confirmations about the legal nature of the transactions and down payment financing were obtained from the firms that were allegedly involved in the down payment financing against the SAFS 66 and EITF 86-29 criteria. Therefore, the evidence collected by the Lincoln Savings and Loan auditors can be evaluated as insufficient and not reliable enough to make conclusions about the conformity of transactions to the real estate investment regulations.

Auditing in Real Estate Sales

General Notions

Drawing from the above presented specific data and their analyses, it is obvious that the auditing procedure in the area of real estate sales is not an easy task. The more knowledge of auditing one gets, the greater number of questions arise regarding the policies of auditing real estate transactions. If applied to Lincoln Savings and Loan, these ideas also work as the practices that the auditors used to monitor the Lincoln Savings and Loan’s activities in Wescon and Emerald Homes transactions lacked focus and completeness. In other words, auditing the transactions, the auditors inquired about the financials but stopped halfway to identifying down payment financing sources being satisfied by the confirmations from Garcia and EH claiming their non-involvement in the situations.

Recognition of LSL revenue

A special aspect of the auditing policies that extensive knowledge can develop is the question of profit and revenue recognition in full or in parts. Conventionally, the income of a company is fully recognized as its revenue for the period after this company provided its goods or services to the business partner and obtained the respective payment for this in full. As well, this company and its partner mustn’t have any long-lasting business obligations under the contract that provided the recognized revenue to the company. In Lincoln Savings and Loan’s case, the income from Wescon and Emerald Homes transactions could not be fully recognized due to two reasons. First, Lincoln Savings and Loan did not obtain the full payment but only the 25% downpayment. Second, business partners had long-lasting liability with Lincoln Savings and Loan to pay the full transaction volumes for less than 20 years.

Conclusions

Based on the above considerations, the work of the auditors in the case of Lincoln Savings and Loan transactions with Wesson and Emerald Homes should be considerably criticized as the auditors have made serious mistakes. First, they left incomplete the task of further investigating the actual sources of the down payment financing in the above-mentioned transactions. Second, they recommended the full recognition of Lincoln Savings and Loan’s revenue while the situation provided two basic conditions that should have been prevented from revenue recognition, i. e. incomplete payment, and long-lasting business liability.

Works Cited

Erickson, Merle, Bryan W. Mayhew, and William L. Felix, Jr. Cases in Strategic-Systems Auditing: Lincoln Savings and Loan. KPMG/University of Illinois, 1999. Print.