Question

(TCO D) Maya is a senior auditor with Childs, Maxwell and Weaver, LLP. Maya specializes in auditing loan loss reserve for financial institution clients. This current year, she has noticed that two of her financial institutions in town have written loans off to a loan customer, Mr. Bill (fictional name to protect the guilty). Mr. Bill is well known in town as a highly successful real estate developer and businessman with many different business dealings. As Maya is auditing on her third financial institution in town, she notices that the bank has loans of $3.5 million outstanding to Mr. Bill. The current loan loss reserve could not cover the losses on Mr. Bill's loans. Maya has recommended a significant increase to the loan loss reserve account. The client will not discuss increasing the loan loss reserve. Ms. Childs, senior partner on the audit, wants to know how the audit firm can justify the increase loan loss reserve account. What can and should Maya disclose about Mr. Bill?

Answer 1

The case given is related to confidentiality and specifically related to audit. It states that one audit that could affect another audit. In the Fund of Funds case in the chapter, the judged ruled that “an auditor must use information obtained about one client in the audit of another ostensibly to protect the public interest with regard to the second client.” According to it, it is necessary that Maya should discuss the matter with Ms. Child’s, who is the senior partner on the audit. The best solution would be for Maya to go into more depth to collect as much evidence as possible regarding the collectability of the loan to Mr. Bill so if it has to be written down, the evidence supports it. It is meaningless to inform the third financial institution client regarding the problem of Mr. Bill with the other two, and to do so may result into the violation of the confidentiality obligation of CPAs.