Question

According to the judge, in the Fund of Funds case, Arthur Andersen could have chosen to resign from the Fund of Funds engagement when it discovered the excessive prices being charged the mutual fund by King Resource. Arthur Andersen contended that resigning that point would not have benefited Fund of Funds. Do you agree? why or why not?

Answer 1

As per the judgement of Fund of Funds V/s Arthur Anderson in 1982, John M. King entered into an agreement with Robert Raff, President of Seattle Brokerage firm, to sell only 10% of certain natural resource to him and this sale was not an arm’s length transaction due to which auditors also questioned about the unrealized appreciation & lack of disclosure in prospectus. The result of this transaction was that the original seller (King), who was the in joint venture with natural resource Corp., of King that lead to unrealized appreciation and also results in increase in earnings and Net Assets Value of the stock an offshore mutual fund & increased in the share price of mutual fund. Therefore, Increase in the share price of mutual fund will also affect the NAV of mutual fund accordingly.

It is also decided that revaluation of Fund of Funds must be audited and supported by An Appraisal Report submitted by appropriate and competent authority & expert and transaction must be of arm’s-length transaction. No unrealized appreciation would be recorded until or unless it is revalue and review properly by competent person based on realistic fair market value.

Arthur Anderson & Co. was also a famous accounting company and was responsible for reporting of Fund of Funds. But, when Arthur Anderson & Co. were aware with the comparative data of King’s Group Cost and Sale Price the Arthur were allegedly required to disclose such matters to Fund of Funds or to resign. Therefore, due to confidentiality prohibited disclosures Arthur has resign from his responsibility.

Arthur’s resignation from his responsibility of discovering the irregularities and used due care in conducting the audit as per generally accepted accounting principles would not have benefited Fund of Funds because Fund of Funds still continued to purchased natural resources from the King’s group based misrepresentation and omission in revaluation of Arthur.