8Ed.sol1.07

8Ed.sol1.07 - CASE 1.7 LINCOLN SAVINGS AND LOAN ASSOCIATION...

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CASE 1.7 LINCOLN SAVINGS AND LOAN ASSOCIATION Synopsis The collapse of Lincoln Savings and Loan Association in 1989 was one of the most expensive and controversial savings and loan failures in U.S. history. Charles Keating, Jr., is seemingly the perfect example of the aggressive, risk-seeking entrepreneurs who were attracted in large numbers to the savings and loan industry when it was deregulated by the federal government in the early 1980s. Many of these individuals, including Keating, developed innovative, if not ingenious, methods for diverting the insured deposits of their savings and loans into high-risk commercial development projects. A large number of these ventures proved unprofitable or were undermined by the greed of their sponsors. The final result was an estimated price tag of $500 billion for the federal bailout of the savings and loan industry. The congressional hearings subsequent to the collapse of Lincoln Savings and Loan resulted in widespread criticism of Lincoln’s auditors and the public accounting profession as a whole. The most serious charge leveled at Lincoln’s auditors was that they failed to ensure that the economic substance, rather than the legal form, of their client’s huge real estate transactions dictated the accounting treatment applied to those transactions. Other important audit issues raised by this case include the responsibility of auditors to detect management fraud, quality control issues related to the acceptance of prospective audit clients, the effect that an extremely competitive audit market may have on client acceptance decisions and ultimately on auditor independence, and the collegial responsibilities of audit firms. Lincoln Savings and Loan Association--Key Facts 1. Charles Keating had been charged with professional misconduct in the late 1970s by the SEC. 2. Keating dominated the operations of both Lincoln and its parent company, ACC, and was largely responsible for the phenomenal growth experienced by the savings and loan during the 1980s. 3. The principal lending activities of Lincoln involved commercial development projects and other high-risk ventures. 4. Lincoln’s real estate transactions were complex and thus difficult for its auditors to
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46 Case 1.7 Lincoln Savings and Loan Association understand. 5. Arthur Young accepted Lincoln as an audit client during the course of an intensive marketing effort to attract new clients. 6. Jack Atchison, Lincoln’s audit engagement partner, developed a close relationship with Charles Keating and lobbied on Keating’s behalf with regulatory officials. 7. Arthur Young relied upon real estate appraisals obtained by Lincoln in auditing certain of the savings and loan’s large real estate transactions.
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8Ed.sol1.07 - CASE 1.7 LINCOLN SAVINGS AND LOAN ASSOCIATION...

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