See AU Section 332 Auditing Derivative Instruments, hedging Activities and Investment in Securities.
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Every written instrument is by definition the memorialization of an event. Absent the event in the real world, the instrument is worthless at best and at worst fraudulent. This is derived from the my knowledge of generally accepted accounting principles (GAAP) as enunciated by the Financial Accounting Standards Board (FASB) supported by the American Institute of Certified Public Accountants (AICPA).
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In any audit of bookkeeping and/or accounting records written instruments are the starting point for inquiry as to whether the documents represents a true and fair representation of an actual transaction. While the auditor may be aware of certain legal presumptions concerning the validity of a facially valid instrument, the auditor is tasked with testing all transactions including those that appear to possess the attributes of facial validity.
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Specifically the audit process for alleged transactions relating to derivative securities (mortgage backed bonds, for example) goes further than standard auditing confirmation under the rules recognized as nationwide and binding. In large part because of the admissions or quasi admissions in settlements with government regulators, attorneys general and investors, it has become obvious that transactions that are related to activity in the derivative marketplace are subject to special scrutiny. Auditors are required to test the following, among other things:
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- Occurrence. Transactions and events that have been recorded have occurred and pertain to the entity.
- Completeness. All transactions and events that should have been recorded have been recorded.
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In the definition of the confirmation process required by auditors, it is clearly stated that a plan of confirmation is to be used. Facially valid documents are not excluded from the confirmation process. And as seen above, transactions relating to alleged securitization are subject to specific testing. The courts are out of their element in assessing the risk of fraudulent representation because the Courts’ inquiry generally starts and ends with the written instrument.
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The Auditor wants to know if the transaction memorialized in that instrument actually took place and wants to see evidence to that effect — i.e., the money trail as represented by cash flow, balance sheet and income statements as well as the general ledger (and supporting documents, bank statements and receipts) of the entity that claims to have been a party to a transaction and now claims an asset as a result.
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These sections are the beginning point for discovery and the foundation for objections when “business records” are proffered at trial as exceptions to the hearsay rule.
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The big question is whether the transactions that are represented in court as loans or assignments or endorsement are actually reflected on the general ledger, bookkeeping records and accounting records of the party who was supposedly involved in any of those transactions is proffering false testimony or fabricated documents into evidence.
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The answer is simple: based upon reliable sources the facts are that the big banks have produced a convoluted set records of loosely connected entities. One fact is clear: the acquisition of loans is generally not found in their records nor supported by any entry reflecting a financial transaction. The little originators and banks are generally buried after having gone out of business, but the ones that are left will show that most originated “loans” did not result in the flow of cash from the originator to the alleged borrower.
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My recommendation is that foreclosure defense attorneys employ the use of CPA’s who have specific auditing experience and knowledge. The testimony of these experts might be invaluable to the discovery process and lead the opposing side to soften their approach.
Filed under: foreclosure | Tagged: AICPA, discovery, FASB, foreclosure defense, gaap, sham transactions | 10 Comments »
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