Reference no: EM133048373

Lincoln Savings and Loan - Employment of a Former Auditor Upon completion of the 1987 Arthur Young (later Ernst & Young) audit of Lincoln Savings & Loan Association (Lincoln) which resulted in an unqualified opinion, the engagement audit partner, Jack Atchison, resigned from Arthur Young and was hired by Lincoln's parent American Continental Corporation (ACC) for approximately $930,000 annual salary. His prior annual earnings as a partner at Arthur Young was approximately $225,000

(Knapp 2001)

Charles Keating, Jr. siphoned money out of Lincoln Savings and Loan for his own benefit from the day he acquired Lincoln in 1984 until the Federal Home Loan Bank Board (FHLBB) seized control on April 14, 1989. At the time of the seizure nearly two-thirds of Lincoln's asset portfolio was invested in high-risk land ventures and Keating had used fraudulent accounting methods to create net income. In the end, Lincoln's demise involved investors' losses of $200 million and its closure cost US taxpayers $3.4 billion in guaranteed deposit insurance and legal, making it the most costly savings and loan failure in US history.

For their part in the Lincoln failure, Ernst & Young paid the California State Board of Accountancy (the state agency which registers California CPAs) $1.5 million in 1991 to settle negligence complaints and in 1992 paid the US Government $400 million to settle four lawsuits. (Knapp 2001)

In the court case of Lincoln S&L v Wall, it was suggested that Atchison might have known about the financial statement problems during his audit of Lincoln. ACC was in dire need of obtaining $10 million because of an agreement with the Bank Board to infuse an additional $10 million into Lincoln. Thus, Lincoln was actually the source of its own $10 million cash infusion. Ernst & Young LLC learned of these facts from Jack Atchison after Atchison had become a top official at Lincoln. (USDC - DC 1990)

At the time Atchison made his move, the practice of "changing sides" was not against the AICPA's ethics standards; however, the Securities and Exchange Commission (SEC) stated that Atchison's should certainly be examined by the accounting profession's standard setting authorities as to the impact such a practice has on an accountant's independence. Furthermore, they stated that it would seem that a "cooling-off period" of one to two years would not be unreasonable before the client can employ a senior official on an audit. (SEC 1990)

Ultimately, the Sarbanes-Oxley Act of 2002 required a cooling-off period of one year after a company's last audit before clients can hire as an officer any member of the audit team.

Discussion Questions

Question 1.What impact does employment of former independent auditors by an audit client have on that auditor's independence during the audit?

Question 2.Atchison's actions ethical?