Global Financial Crisis Challenges on Editors

Discuss about the Global Financial Crisis Challenges on Editors.

A financial crisis is a situation where there are financial difficulties which cause stress or tension to the economy of a country or region. This economic stress also ends up affecting the social and political stability of the region in question (Pound et al, 1980). A few years ago, the global financial market was faced by a severe and tremendous financial crisis that caused a lot of loss and difficulties for most countries. The challenges and effects that resulted from this crisis were serious as well as complicated at the time.

However, these challenges and effects strongly hit mostly the developing countries. Nevertheless, even the developed countries faced some effects which according to them were also server because they seemed to last long. E.g. certain financial institutions in the US were faced by increased mortgage loans defaults which resulted from lack of finances to pay. This crisis started mostly as a liquidity crisis whereby the investors stopped lending their money to institutions which therefore made the crisis to upgrade into a solvency crisis (Harms et al, 2006). However, since the central banks of the many different countries adversely affected were giving finances to the smaller banks they stopped doing that directly but rather opted to introduce policies that would help those banks grow and concur the crisis on their own. These policies include the monetary and fiscal policies that are still being used nowadays (Tektas et al, 2005).

A financial Auditor is somebody who is a person whose responsibility is to give a professional opinion and report on financial statements of any organization. According to ISA 200 principles, the auditor’s objective and responsibility is to give and express his/her opinion in accordance to the financial statements are prepared and how they appear. Therefore, the auditing process should be conducted in accordance with the procedures, legal and professional standards. However, with the fact that auditors are responsible for the financial statements opinion, then they are subjects to considerable liability. While doing the auditing process, the auditor is responsible for certain facts like:

  • Defining terms and type of mission to be conducted according to the IAS.
  • Determining the mission’s objective.
  • Adjusting events leading to financial statements.
  • Analyzing all the significant profits and losses of the organization to name just but a few.

Therefore, in relation to the financial crisis and financial auditors responsibility, the financial auditors are faced by different liabilities came up with the financial crisis. This because the governments and the Central Banks of the affected countries were unable to control the crisis further after it seemed to take a long time (Dagher et al, 2015). Therefore, the supervisory and regulatory structures were not able to make changes to better the financial crisis therefore it ended up affecting business organizations and companies. This means that apart from a country’s financial statements being affected, those of the businesses organizations and countries were too. Furthermore, the auditing process and activities were affected too which meant that financial auditors became more liable to their responsibilities i.e. their liability increased as the crisis grew.

Financial Crisis and Auditors Liability

Severe distress of the financial markets and institutions turned to global financial crisis which ended up affecting business organizations and their performance. Some of these crises include:

Rapid Debt Increase

This is where the prices of products and services rose to the peak such that most consumers were not able to purchase products. This happened in the US in the year 2006 whereby the prices rose very high and then dropped more than 30% after a while. When the prices rose, financial institutions had the responsibility to offer credits to people to help them purchase products and services and to business organizations to help them run the business operations and maintain their production. This means that the lending to low income borrowers rose rapidly which affected the economy adversely. Furthermore, the prices dropped again immediately causing a lot of financial disturbances to the affected organizations.

Therefore, with this crisis affecting the organizations and the country as a whole, it led to the negative effects of the financial statements of the affected organizations as well as the auditors operations for those organizations. This means that the organizations financial operations were disturbed from their normal routines (Tasios et al, 2012). E.g. there were more losses than profits made within a short period, the number of debtors increased, decreased sales among others. This meant that since the auditors were always in charge of giving financial opinions on the financial statements, then their liability was increased. They had to be keener on what the statements meant, how they were made and what kind of opinion they should give.

Low Policy Rates

This crisis is in relation to the financial markets. They often put in place low policy rates to govern their finance lending. When these policies are set to be low, then the financial institutions are likely to be misused and manipulated by the financial borrowers especially business organizations. This manipulation may lead to more borrowing and misuse of funds borrowed. When business organizations do more borrowing and keep the funds as liquid without investing, then it means that their financial statements will be disturbed as well as those of the lending institution (Kasner et al, 2001). With the financial statements of these businesses and organizations being affected they then become vulnerable to many challenges which end up effecting the operations of the financial auditors as well. When the auditors are affected they become more liable to the organization when it comes to giving their opinions on financial statements.

Large and Increased Unemployment Rates

Currently, in many countries economic distress has caused many negative effects on public finances. Many countries face finance deficits especially when it comes to paying of civil servants and to providing jobs to their citizens. This has therefore led to increased unemployment rates to the countries in question ((Rauch et al, 2014). Also, when the economy is distressed, then the business operations seem to slow down and performance to drop therefore financial disturbances. When the finances of a country are disturbed, then the financial auditors’ responsibilities become more sensitive this leaves them to more liable of what opinion they give about the financial statements

Fluctuations of Public Sector Finances

Some countries sometimes experience a drastic shortfall in revenues and increased expense rates which eventually cause economic distress. This kind of crisis happens mostly when a country does not impose good or effective fiscal policies to govern the financial institutions and business organizations (Rauch et al, 2014). Therefore, when a country does not have moderated public sector finances or the Gross Domestic production is not stable, then the country is said to have fluctuated production. When a country’s finances fluctuate, it means that their financial statements will not have an even trend. Furthermore, the financial statements may even have very many defaults and may face many challenges that may affect their trend which makes them vulnerable. Therefore, when the financial statements of the country, its financial institutions and businesses situated there are affected then the auditors practice and responsibilities are affected too (Nachescu et al, 2010). This will therefore force the auditors to be more liable to the opinions that they provide for the organizations about their financial statements.

Fraud and Faults

Wrong financial statements presentation due to fraud and errors especially when it the wrongs have a possibility of affecting financial decisions and the decisions of the users of financial statements. A business organization or a financial institution has the capability of giving the wrong information in their financial statements which will definitely affect the opinion levels of the financial editors. This is possible especially when an organization has been facing financial stress leading to misuse of finances (Cooper et al 1994). Generally when a country has got financial stress, it means that the business operating there are likely to forge their financial information to make it seem better and have an even trend. However, even though it is not the duty of financial auditors to detect and solve frauds, they are liable to the organization to give a reasonable assurance that the financial statements of an organization are accurate and free from fraud and faults (Loser, 2013). Therefore, this makes them partially liable to detect and stop fraud and intentional errors in the organization.

In relation to the above crisis, then the auditor is also liable to the organization to report its organization information after auditing. This liability is in relation to how the auditor wants corrections and adjustments to be made in the financial statements. The organization expects the auditors to give their opinions no matter what the financial statements appear to be and report back. However, the auditors are liable to the IAS to give the best opinion in accordance with the financial statement (Dagher et al, 2015). This stressed especially when a country or an organization is experiencing economic stress and financial stress. This is because there are probabilities that the auditor may tamper with the audit report to make the company seem to be in a better position. In addition to that, also the organization itself can tamper with their financial statements so that the auditor can make the best report for them which may not be true.

Causes of Financial Crisis

As mentioned earlier, the financial crisis that hit the world some years ago mainly started in the US and later spread to all other regions including to the real economy of the world. However, the countries that were hit or affected the most are the developing countries or that did not have a strong economy by that time. The following are some of the causes of the financial crisis in general:

Macroeconomic Causes

These include the external factors that are related to organizational finances that affect a business, its operations and management. They are the things that have an effect to a business or county’s culture or practices and the organization can do nothing to change them or even avoid them i.e. they are out of a business’s reach. Therefore, when they affect organizations highly and negatively then they may end up causing financial crisis for the organization or a country as a whole (Dermine, 2009). These factors may include: Low inflation and low interest rates, growing financial and economic imbalances and lack of an even financial cycle.

Financial Market Causes

The financial markets are made up of the financial institutions like the World Bank, Central Bank, Commercial banks, financial societies and other organizations that are responsible for providing funds to the public. Therefore, they are responsible for some financial crisis in a country because they are the ones that should control the liquidity of cash as well as put policies in place that should govern the lending and borrowing (Dagheret et al, 2012). However, they have weaknesses too, which are said to be the main causes of financial crisis: increased innovations of the financial innovations, underestimation of the system-wide risk, lack of enough risk management, lack of risk evaluation especially by credit agencies to name just but a few factors.

Policy Implementation and Regulatory Failures

It is widely known that a country’s government and the central banks are responsible for regulating the domestic financial systems in those countries. This means that, the procedures, rules and regulations that are put in place to govern the financial institutions have to come from the government or the central bank (Woolf, et al, 2013). However, these policies may be implemented but may not work or be functional i.e. the financial crisis may emerge from the failure of regulation and supervision of financial markets due to lack of effective and good policies. They may include: Government lowering credit control for the banks, lack of international coordination and harmonization, governments guarantee the financial system, winding up procedures for banks among others.

In summary, there are several factors that have to be combined to be able to cause a financial crisis. However, these factors have got different effects to the economy but if adversely felt they can cause serious effects to the real economy of the whole world.

Conlclusion

To conclude this essay, I can say that auditors play a very important role in making sure that the financial status of many different organizations are in good condition and are effective for the success of the business. Nevertheless, they always face challenges in their practices and responsibilities which may be due to financial crisis affecting the whole world or the organization alone. No matter what the financial crisis is from, the auditors’ practices ought to be challenged and negatively affected since they deal organizational finances. Therefore this means that the more the crisis the more the auditors become liable to their responsibilities for the business. In addition to that, the many factors that cause financial crises are also related to the effects that auditors face. This is because if these factors are to cause financial crisis for a certain organization, it means that the financial statements of the organization in question will be affected by auditor’s report and opinion.

References

Bradley, E. (1965). Auditor’s Liability and the Need for Increased Accounting Uniformity. Law and Contemporary Problems, 30(4), p.898.

Cooper, B. and Ling Barkoczy, M. (1994). Third Party Liability. Managerial Auditing Journal, 9(5), pp.31-36.

Dagher, J. and Kazimov, K. (2012). Banks’ Liability Structure and Mortgage Lending During the Financial Crisis. IMF Working Papers, 12(155), p.i.

Dagher, J. and Kazimov, K. (2015). Banks׳ liability structure and mortgage lending during the financial crisis. Journal of Financial Economics, 116(3), pp.565-582.

Dermine, J. (2009). Bank valuation & value-based management. New York: McGraw-Hill.

Harms, D., Mo, C. and White, M. (2006). 38th annual institute on securities regulation. New York, NY: Practising Law Institute.

Kasner, J. and Vanyo, B. (2001). Securities litigation, 2001. New York, N.Y.: Practising Law Institute.

Loser, P. (2013). Financial Crisis – The Liability of Banking Institutions. Journal of European Tort Law, 4(2).

Millstein, I. and Ferrara, R. (2004). Second annual Directors’ institute on corporate governance. New York, NY: Practising Law Institute.

Nachescu, M. and Mataragiu, A. (2010). GOING CONCERN. THE AUDITOR’S LIABILITY TOWARDS THE LAWFULNESS APPEARANCE. Latgale National Economy Research, 1(2), p.278.

Pound, G. and Courtis, J. (1980). The Auditor’s Liability: A Myth?. Accounting and Business Research, 10(39), pp.299-306.

Rauch, J. and Wende, S. (2014). Solvency Prediction for Property-Liability Insurance Companies: Evidence from the Financial Crisis. Geneva Pap Risk Insur Issues Pract, 40(1), pp.47-65.

Rauch, J. and Wende, S. (2014). Solvency Prediction for Property-Liability Insurance Companies: Evidence from the Financial Crisis. Geneva Pap Risk Insur Issues Pract, 40(1), pp.47-65.

Tasios, S. and Bekiaris, M. (2012). Auditor’s perceptions of financial reporting quality: the case of Greece. ijafr, 2(1).

Tektas, A., Nur Ozkan‐Gunay, E. and Gunay, G. (2005). Asset and liability management in financial crisis. The Journal of Risk Finance, 6(2), pp.135-149.

Woolf, E. and Hindson, M. (2013). Audit and accountancy pitfalls. Hoboken, N.J.: Wiley.

 

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