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Compliance with GAAP does not stop client's lawsuit.

Legal Scene

An Arizona appellate court ruled compliance with generally accepted accounting principles did not relieve an accounting firm of its duty to its client.

Hydroculture, Inc. hired Coopers & Lybrand to audit its financial statements. Coopers asked Hydroculture to reverse income recognition on three transactions already recorded on its books. Hydroculture disputed the accounting change but ultimately agreed when Coopers refused to issue an unqualified opinion.

The change was made and Coopers issued an unqualified opinion.

Later, because of the audit Hydroculture had difficulty obtaining funds for continued operations and filed for bankruptcy. Subsequently, the company sued Coopers, alleging the accounting firm had been negligent in requiring it to reverse income recognition on the disputed transactions. Hydroculture argued at trial that Coopers had advised the company it could recognize the income but later changed this position during the audit. The trial court granted summary judgment in favor of Coopers.

On appeal, Coopers argued that, as an independent auditor, it was required to verify its client's transactions were presented in accordance with GAAP and that its duty to the public supplanted the duty it owed to the company. The court, however, rejected this argument, finding the duty to comply with GAAP did not override the firm's duty to its client.

Further, Coopers argued that, even if negligence could be proven, the negligence did not cause Hydroculture's demise. The court also rejected this argument, finding an auditor who was negligent in conducting an audit might be liable to its client.

Finally, Coopers argued that Hydroculture should have hired another accounting firm to perform the audit if it was unhappy with Coopers's work. The court cited evidence that Coopers's delays prevented Hydroculture from retaining another firm and concluded this argument was illusory. (Hydroculture, Inc. v. Coopers & Lybrand, 848 P.2d 856)
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Title Annotation:Arizona; Hydroculture, Inc. v. Coopers & Lybrand
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Dec 1, 1993
Words:298
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