Question

In: Accounting

The following are independent situations. Analyze each situation and provide your assessment of the potential resolution...

The following are independent situations. Analyze each situation and provide your assessment of the potential resolution of each scenario, including potential liability for the auditor.

  • The audit firm, Smith and Jones, LLP, received a subpoena for its documentation related to the audit of Sanders Corporation’s financial statements. The firm has refused to respond, alleging that the documentation is considered privileged communication between the firm and its client.
  • John Doe, CPA is a defendant in a lawsuit alleging that Doe should be held legally liable for gross negligence for a fraud involving the valuation of securities included in the financial statements of one of his clients. Doe was uncertain how to establish a correct valuation for the securities and decided to rely on the price estimation provided by management.
  • Joan Rogan is a partner in an audit firm that operates as a limited liability partnership (LLP). The firm has been sued for alleged audit failure related to an audit engagement handled by a different partner of the firm. While Joan had no involvement in the engagement, she is concerned that the plaintiff may successfully sue her seeking restitution from her personal assets.
  • Eastman Kodak filed for bankruptcy in January 2012. A recent blog suggested that Kodak’s external auditors should be sued for failure to qualify the firm’s opinion on the financial statements issued before the bankruptcy, even though the fair presentation of the financial statements is not disputed.

Solutions

Expert Solution

• The audit firm, Smith and Jones, LLP. He is correct in the response provided to the audit of the financiers made to the Sanders Corporation. The firm may consider changing the response, if the Sanders Corporation is the one requesting documentation or information in the option of its financial statements.


• John Doe, CPA, if responsible for the negligence related to the valuation of the securities included in the financial statements. However, the responsibility also belongs to the administration for the information provided. Which should argue in the trial the reason that led him to rely on the price estimate provided and not on their own media and information.


• Joan Rogan, as a member of a limited liability company, is responsible for the capital subscribed in said company. The plaintiff can not sue him requesting the return of his personal property, because they are unrelated to the audit firm.


• The external auditors of Kodak have a responsibility at the time of rating the situation of the company, in their issued financial statements. In order to be sued, the reasonable presentation of the financial statements and their opinion must be disputed, thus alleging the primary reasons why Eastman Kodak filed for bankruptcy in January 2012.


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