Lincoln Savings

1
Lincoln Savings Loan
2
Overview

• Background Info
• Part A Areas of Risk
• Part B Implications of Risks
• Part C Appraisals
• Lessons to be Learned
• Performing an Industry Analysis

3
Problem Introduction

• Lincoln Federal Savings Loan (LSL)
• California chartered SL
• 1984 Charles Keating/American Continental
• Corporation bought LSL
• 1987 Arthur Young Co. audited LSL
• 1989 ACC went bankrupt

4
Industry Background

• Purpose
• Economic Environment
• Regulatory Environment
• Accounting Practices

5
Part A Areas of Risk

• Enterprise Risk
• Engagement Risk
• Financial Reporting Risk
• Audit Risk

6
Enterprise Risk

• Lower Barriers to Entry
• More Competition
• Company Strategy
• Role of LSL
• Sketchy Survival Tactics
• Risks of SL Industry
• Interest Rate Risk
• Real Estate Risk
• Uncollectible Loans (Credit Risk)

7
Engagement Risk

• Questionable Company Practices
• Management Ethics
• Compensation Structure Schemes
• Key Officers Conflict of Interest
• Unreliable Appraisals

8
Financial Reporting Risk

• Stretching Accounting Rules for SLs
• Loan Valuation
• Goodwill
• Appraisals
• Acquisition Reporting
• Cherry Picking

9
Part B Implications of Risks

• High Audit Risk Due to the Other Risk Areas
• Requires
• More time involvement
• More research
• More staff
• Direct testing of account balances