Scenario 3

Summary

Charles Keating founded the real estate firm, American Continental Corporation and later acquired Lincoln Saving and Loan Association. The principal lending activities of Lincoln involved commercial development projects and other high-risk ventures. Keating is later been critics for his creative accounting.

One of the most scrutinized of Lincoln’s multimillion-dollar real estate deals with Hidden Valley transaction. Lincoln recorded a profit of 11.1 million, Lincoln loaned 19.6 million to Garcia Company, A close friend of Keating, Ernie, extended a loan of 3.5 million to Wescon, and later use that payment to purchase land from Keating, thus Lincoln recorded the gain but the gain is never realized. This situation arise due to the substance over form (Substance over form is an accounting principle used "to ensure that financial statements give a complete, relevant, and accurate picture of transactions and events". If an entity practices the 'substance over form' concept, then the financial statements will show the overall financial reality of the entity (economic substance), rather than the legal form of transactions). Keating is also charged with influence peddling senators.

For the audit history, in the pre acceptance stage, Arthur Young was not informed of the current FHLBB investigation, and the audit firm cannot gain full understand of Lincoln’s industry due to its complex transaction.

Despite the interest-free loans to ACC, Arthur Young still issue a unqualified opinion. After the 1987 audit, engagement audit partner, Jack Atchison developed a close relationship with Charles Keating and lobbied on Keating’s behalf with regulatory officials, this cause the congress to question Atchison’s independence.

After Atchison’s resign, Janice became the engagement partner, she starts to question Lincoln’s accounting, and one major disagreement caused the Arthur Young to resign from Lincoln’s auditor.

Criticism of Arthur young was that Arthur Young readily...