It greatly experienced many years of celebrated financial growth, based on the existing stock price appreciation in its earlier operations, before going on to face serious accounting problems. The financial problems cropped in the Corporation in
A study of the new century financial corporation Post on: It was a Maryland corporation based in Irvine, California in business to originate, purchase, sell and service home mortgage loans.
New Century was an aggressive subprime lender catering to customers who could not qualify for conventional mortgage loans. New Century would then pool these loans and sell them in the mortgage secondary market at a profit. These loan sales came with warranties and representations which if breached could require New Century to repurchase the loans at a substantial loss.
New Century Financial filed for bankruptcy protection on April 2nd The executives at New Century Financial violated many accounting rules and U. These loans were risky, because the buyer of the property was able to make the purchase without risking any money of their own. Additionally, New Century disclosed materially misleading loan to value LTV information on its loans.
In New Century experienced an increasing rate of Early Payment Defaults and First Payment Defaults, which could trigger the loan repurchase obligation. In addition to its actual repurchases, New Century had a backlog of repurchase requests that it did not disclose in Failure to disclose these significant facts greatly altered the information available to investors regarding the Company and would have had an unfavorable impact on net revenues and income from continuing operations.
Furthermore, each of the company officers benefited from the financial misstatements in terms of pay, and bonuses, none of which was returned to shareholders. During the year the CEO and CFO made misleading statements in press releases and earnings calls regarding the financial position of the company.
However, prior to the second quarter ofthe repurchase reserves recorded by New Century Financial were sufficient to state the net value of the assets in amounts materially in compliance with SFAS In the second quarter ofhowever, the reserve calculation methodology was changed resulting in much lower reserves.
As a result of these changes, the net assets were no longer stated at fair value, a violation of SFAS This reduced its repurchase expense and overstated revenues. SFAS 5 requires accrual of loss contingency if information indicates that it is probable that the liability has been incurred and the amount can be reasonably estimated.
The liability related to the substantial backlog of unprocessed repurchase claims was not properly accrued, a violation of SFAS 5. This allowed New Century to overstate its financial performance. Furthermore, it was stated that New Century Financial had no undisclosed material liabilities, and that the financial statements complied with the requirements of the Exchange Act.
They resigned in Aprila few months after New Century filed for bankruptcy. Although they had completed a significant portion of the field work for the audit prior to their resignation, they did not issue an opinion on the financial statements.
They issued unqualified opinions in all prior years audited by them. They also performed reviews of the quarterly financial statements through and performed audits of the effectiveness of internal controls at New Century SOX audits for and Missal was charged with identifying any potential causes of action that might arise from the New Century bankruptcy.
He suggests that, during those years, KPMG failed to follow professional audit standards and that certain members of the audit team were complicit in the fraud by giving advice to New Century, which was followed by them, that was inconsistent with generally accepted accounting principles and that resulted in material misstatements.
The three general auditing standards require that 1 the auditor must be technically competent, 2 the auditor must be independent and 3 the auditor must exercise due professional care.
Missal provided evidence that KPMG failed to meet any of those standards. Missal reviewed the New Century engagement staffing during and During the first quarter review inthe entire audit team was new to the engagement other than two junior auditors.
The engagement partner was new to KPMG and had very limited experience in the mortgage banking industry. The senior manager was a recent rehire of KPMG and his only industry experience was a three year stint as an assistant controller at a small mortgage lending company.
The concurring partner had worked primarily with financial institutions and leasing companies. Field work on two of the most sensitive areas testing of the repurchase reserve and residual interest valuation was done by first year auditors. Given the complexity of the mortgage banking industry, Mr.
Missal argued that the team did not have the technical skill required to audit New Century. The senior members of the audit team ignored or dismissed concerns raised by KPMG specialists about the appropriateness of certain accounting methods used by New Century.
Missal concludes that the senior audit members were more concerned about retaining the client than they were about the quality of the audit work and therefore lacked independence. There were numerous examples given by Mr. Missal also noted that certain significant control deficiencies noted as part of the SOX audit were not communicated, as required, to the Board of Directors and that the SOX audit did not consider, as required, the failure of New Century to resolve control deficiencies noted as part of the prior year SOX audit.
Missal also provided evidence KPMG was complicit in the fraud.Although New Century Financial business risks involved a great portion of internal mistakes, external factors such as Federal Reserve¶s monetary policy played a significant role in deterioration of business opportunities for the New Century Financial Corporation.5/5(3).
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The case study examines New Century business model and accounting and focuses on the role of management, audit committee and external auditors in the problems at New Century based on the findings of the Bankruptcy Examiner. After years of rapid growth and price appreciation, New Century Financial Corporation, one of the largest issuers of subprime loans in the United States, reported accounting problems at the beginning of Change Your Timezone.
This study examines the business model of the new century and accounting practices, and focuses on the role of management, the audit committee and external auditors in the problems of the new century based on the findings of the Bankruptcy Examiner.