Question

On November 20, 2012, Hewlett-Packard (HP) disclosed that it discovered an accounting fraud and has written down $8.8 billion of the value of Autonomy, the British software company that it bought in 2011 for $11.1 billion, after discovering that Autonomy misrepresented its finances. In May 2012, HP had fired former Autonomy CEO, Dr. Michael Lynch, citing poor performance by his unit.

Provide a brief discussion of the auditor liabilities and the potential defenses.

What duties of care, laws, or responsibilities to clients were violated?

What are the potential defenses available to the accountants and auditors involved in the situation?

Answer 1

Auditor liabilities

The auditor can be held negligent in conducting the Autonomy's audit. In other words the auditor can be sued for breach of duty to not act reasonable with skill and care in failing to report the fraud done by Autonomy. It is the duty of the auditor to ensure that the Company's financial information as prepared by the director's correctly reflects the Company's position.

Further since the auditor has given clean report, it is upon the auditor to prove that they had their work properly.

Potential defenses in HP

Auditor can state that they were not hired to due diligence on HP's acquisition. They can prove that the their work was in full compliance with regulation and professional standards.If the auditor can prove this then there won't be any trouble for the auditors.

Duties of care, laws or responsibilities to Clients

Generally the auditor's duty is derived from -:

a) Statue -: They are implied to give true and fair view on the financial statement of the Company. They have to following various accounting standards and other professional standards.

b) Engagement terms with the Client-: It mentions the fact that they have to do work with full reasonable care and skill.

c) the tortious duty of care

d) In other capacities such as to maintain confidentiality, duties of loyalty etc.

Defenses available to the auditors and accountants

Auditor and accountant of the Company has to prove that they acted in good faith. They had followed all the accounting and professional standard while finalizing the financial statement.