Compliance with GAAP does not stop client's lawsuit.Legal Scene An Arizona appellate court A court having jurisdiction to review decisions of a trial-level or other lower court. An unsuccessful party in a lawsuit must file an appeal with an appellate court in order to have the decision reviewed. ruled compliance with generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting did not relieve an accounting firm of its duty to its client. Hydroculture Hydroculture is a type of hydroponics in which plants are grown in a media that allows the distribution of water and nutrients through capillary action. Clay aggregate such as LECA and Hydroton can be used to anchor plants when growing with hydroponics. , 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 Unqualified opinion An independent auditor's opinion that a company's financial statements comply with accepted accounting procedures. Antithesis of qualified opinion. unqualified opinion See clean 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 Independent Auditor An external auditor with a certified public accounting designation that qualifies him or her to provide an auditor's report. Notes: These auditors aren't affiliated with the company being audited. , it was required to verify its client's transactions were presented in accordance with GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (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 il·lu·so·ry adj. Produced by, based on, or having the nature of an illusion; deceptive: "Secret activities offer presidents the alluring but often illusory promise that they can achieve foreign policy goals without the . (Hydroculture, Inc. v. Coopers & Lybrand, 848 P.2d 856) |
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