Question

In 1997, a disagreement arose between Livent Inc. and its auditor, Deloitte and Touche (Deloitte). Livent, which operated several theaters for live stage production, had sold the naming rights to one of its theaters to AT&T for $12.5 million. The agreement was oral, and one of the theaters was under construction. The auditors for Deloitte believed that only a portion of the deal should be included in revenue, but Livent wanted to book the entire $12.5 million. Livent retained Ernst & Young (EY) to provide an opinion on the transaction. EY’s report indicated that all $12.5 million could be recorded as revenue. Deloitte hired Price Waterhouse (currently PricewaterhouseCoopers) to review the transaction. Price Waterhouse agreed with EY and Livent, and Deloitte allowed Livent to book the $12.5 million. In 1998, Livent issued a series of press releases indicating the discovery of significant account irregularities and, later in 1998, Livent declared bankruptcy.

Required: Exhibiting professional competence and due professional care are part of the general standards set forth in the AICPA Code of Professional Conduct. Comment on the decision to engage public accounting firm competitors EY and Price Waterhouse concerning the disagreement over the accounting treatment of the $12.5 million transaction. Do you believe that hiring a competitor firm is sufficient to meet due professional care standard even though the company eventually declares bankruptcy?

Answer 1

In an accounting and auditing field, there are many firms competing with each other. Each firm is a different entity and in a way competitor to each other.

Many a times, owing to complications of the businesses there are transactions which can be a point of conflict as to what treatment should be provided to them. In such cases, advisory is taken from the outside parties as to how to to treat the particular transaction.

Big firms like Delloite and other Big 4s have various business verticals along with auditing and assurance. As a professional, they conduct through their set standards and are obliged to the client for their services.

In the present case, it is the client to whom EY have provided the services and PwC to Delloite. They both are independent entities and have several level of management checking before an opinion is given. It is improper to believe that they would give false opinions to the client and Delloite as they are competitors.

In other businesses also, like Apple purchase their screens from Samsung and LG who happen to be their competitors. However it does not mean that they will provide them with faulty screens.

AICPA Code of Professional Conduct requires that company follow due delligence in their assignment. Taking opinion of other organisations who happen to be the competitors is a sufficient means to meet due professional care standard even though the company eventually declares bankruptcy