The Banking Crisis in the UK and the US Essay Example | Topics and Well Written Essays - 2750 words

The Banking Crisis in the UK and the US - Essay Example ISA (UK & Ireland) 300 gives the right of independence to public auditors with respect to compliance with ethical requirements. ISA 300 also allows auditors to consider acceptance of the audit engagement before starting the audit. ISA 315 (UK & Ireland) gives the auditors to understand the internal governance system pertaining to risks of material misstatements and ISA 330 (UK & Ireland) even gives the auditors the right to extend the audit scope to carry out sufficient tests of controls. Given the level of empowerment to Public Auditors by the ISA, they would definitely be expected to stand and answer the reasons of this sudden turmoil in banking & financial services industry as if a time bomb was planted to be exploded and they couldn't detect the same. The financial crisis in the UK and the United States has occurred due to the same primary factor - uncontrolled Sub-Prime lending and sale of packaged "Collateralized Debt Obligations (CDOs)". Sub-Prime lending initially started with loan products for customers that do not possess a clean credit history or regular source of income. The risks against such lending were managed by acquiring collaterals of better valuation. This is the reason that the home mortgage market in both UK and the US was selected as the most suitable area for productizing sub-prime lending packages given that the property markets in both countries were booming. Banks perceived clear advantages in acquiring the homes as collaterals under mortgage deals. But the rising prices of homes were of no benefit to banks. Hence, they found a method of gaining out of the increasing valuations of the home prices - the "Collateralized Debt Obligations (CDOs)". The banks in UK & US modified their loan management life cycle w hereby the loans backed by collaterals (home mortgages) that were originally withheld by the banks internally were pooled into what is known as "Special Purpose Vehicles" or "Special Investment Vehicles" To determine the valuation of the CDOs, a new role called "Pooling Underwriter" was created in every bank in these two countries. The CDOs were sold to external investors thus developing the notion of money flowing through "conduits" from investors to borrowers that de-risked the banks. As a result, these loans went out of the balance sheet of the banks and a new asset called "derivatives" was added in the