5202 note - AF5202 1 The article What do we know about...

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AF5202 1. The article: What do we know about audit quality? Proxy for audit quality
2. What are the two qualities required for qualified auditor: competence, independence
3. The smartest guy in the room 4. Inside job 5. Enron case, questions in the end 6. Dodd-Frank Act The legislation created financial regulatory processes to limit risk by enforcing transparency and accountability. Because the Great Recession of the late 2000s was due in part to low regulation and high reliance on large banks, one of the main goals of the Dodd-Frank Act was to subject banks to more stringent regulation. The Act keeps the banking system under a closer watch. 7. Financial crisis S.P. Kothari: Home Mortgage borrowers doesn’t qualify for the mortgages by traditional lending criteria. Lending criteria were relaxed dramatically which qualified a whole class of first-time borrowers. Lower interest. Banks have incentives to relax lending standards. Banks served as intermediaries to collect fees. Accounting standards facilitate the fair value accounting rules, and cause immediate gain which is a big incentive for mangers to maximize the number and number of mortgages. Auditors didn’t really check the false information in loan applications. And the rating agencies didn’t check for the ability f the borrowers to repay the loan. Rating agencies understate the default risk.
Accounting standards allow instant gain which create opportunities for managers to take advantage of. And lack of writing down of loans facilitated excessive risk taking. Implication: accounting standards that provide higher quality accounting information, more reliable, better oversight board.

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