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Lincoln Savings and Loan: Cause of Audit Failure

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Discuss the Lincoln Savings and Loan audit failure related to lack of industry knowledge. Consider whether there are any industries for which audits do not require particular industry expertise on the part of the audit partner. How does rotation of the audit partner (as required by SOX and the SEC) interact with the need for industry knowledge and risk of performing an audit?

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Solution Summary

Your discussion is 380 words and discusses that not all audit clients require special expertise (with examples). Was Lincoln Savings and Loan audit failure a lack of industry knowledge? Partner rotation? The issue of "to rotate or not to rotate" is discussed and a solution is suggested to the rotation dilemma.

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The Lincoln Savings and Loan audit did require an understanding both of loans (and therefore the related loan loss reserve) and valuing property on defaulted or risky loans (where property is likely to be the net realizable value of defaulted loan). Few auditors have real estate appraisal expertise or understanding of mortgage loans and land development projects. As a result, clients such as Lincoln Savings and Loan should be staffed and supervised by those with an understanding of ...

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Carol Sargent, PhD
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  • MSc, University of Virginia
  • PhD, Georgia State University
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