Refer to Theory in Practice vignette 1.2. New Century’s accounting policies were severely questioned following the 2007– 2008 market meltdowns. KPMG was drawn into the lawsuits that followed New Century’s filing for bankruptcy protection.

a. Do you agree with New Century’s policy of derecognizing mortgages transferred to investors from its balance sheet, and creating an allowance for credit losses resulting from mortgage buybacks? The alternative would be to retain the mortgages on New Century’s books and treat the proceeds received as a liability until the mortgage had to be bought back or the buyback commitment expired. If the latter, then both the mortgage and the liability would then be transferred to income.
b. Do you agree with New Century’s policy of valuing its retained interests at their discounted present value? Explain why or why not.
c. Would a more conservative policy for valuing mortgage credit loss provisions for buy-backs have reduced the likelihood of lawsuit against the auditor? Explain.

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