New Century Financial Corporation

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New Century Financial Corporation

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Case Study |

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Contents

Company Overview 3

External Analysis – Industry 4

Internal Analysis 6

Management, Board of Directors, Audit 6

Applicable Financial Accounting Standards – FAS 5 and FAS 140 6

Key Internal Accounting Controls 7

Primary Business Risks 8

Accounting Requirements and Practices Relevant to the Business Risks and Reporting Items 12

Primary Financial Reporting Items Related to the Business Risks and NCF Financial Reporting Errors 13

Reasons Why Accounting Failures Went Undetected for so long despite Changes in Governance in the post-Sarbanes-Oxley Act Era 15

Accounting controls that could have prevented or detected errors 16

Concluding Notes 18

References 19

Company Overview

New Century Financial Corporation was founded in 1995 by Robert Cole, Brad Morrice, and Edward Gotschall. The Company went public in 1996 and was listed on NASDAQ. New Century Financial Corporation operated within the U.S. Subprime Mortgage Industry. The primary activities for the Company included originating, retaining, selling, and servicing home mortgage loans designed for subprime borrowers, who were not eligible to apply for prime mortgage loans. By the year 2006 New Century Financial Corporation expanded its product range to include fixed-rate mortgages, adjustable rate mortgages (ARMs), hybrid mortgages, and interest-only (IO) mortgages. The New Century products were from the two Company’s divisions of Wholesale Loan Division and Retail Mortgage Loan Division, which differed in terms of sales channel (indirect and direct). The New Century Financial Corporations employed almost 1,000 account executives and 50,000 independent mortgage brokers in 19 states within its Wholesale Loan Division whereas it operated 235 sales offices within Retail Mortgage Loan Division in 35 states.

New Century Financial Corporation was able to generate significant sales...