Financial institution audit exposure.

FINANCIAL INSTITUTION AUDIT EXPOSURE

In what has traditionally been a high exposure area for auditors, an Illinois appellate court further expanded an auditor's duty for detecting and disclosing improper loans. The accounting firm, Brumleve and Dabbs, was engaged to perform an audit of the First National Bank of Sullivan for the fiscal year ended September 30, 1985. In 1986, the Office of the Comptroller of the Currency (OCC) advised the bank to charge off approximately $2 million in bad loans. Subsequently, the bank brought suit against the auditors, alleging they failed to detect and disclose loans in excess of OCC guidelines to bank officers. It also was alleged the loans were renewed without requiring adequate collateral from the debtors and the accountants failed to disclose that the allowance for doubtful loans was insufficient.

The trial court dismissed the bank's complaint. This dismissal was based on evidence that bank officers knew of the inadequacy of the doubtful loan reserves and insider transactions. The defendants argued successfully that losses would have occurred regardless of the content of the audit report.

On review, the appellate court reversed the dismissal of the case, stating that whether Brumleve and Dabbs' audit was the cause of the bank's loss was a jury question. The court reasoned that disclosure of bad loans by the auditors may have limited the bank's losses. Consequently, the case should be allowed to proceed to trial.

This case further increases the already substantial expense and length of trial for Illinois auditors sued for malpractice by allowing cases to proceed through trial. The case also increases the risk that an auditor will be subject to a monetarily large jury verdict. (First National Bank of Sullivan v. Brumleve and Dabbs, 539 N.E. 2d. 877, 183 I11. App. 3d. 987)

Wayne J. Baliga, CPA, JD, vice-president, AON Corp.