Fraud can be an auditor's defense.A Pennsylvania federal court ruled that business owners who engaged in fraudulent conduct could not sue their auditors, but third parties who relied on the auditor's reports Auditor's Report Recorded in the annual report, the auditor's report tests to see that a corporation's financial statements comply with GAAP. This is sometimes referred to as the clean opinion. Notes: Most auditor's reports consist of three paragraphs. could. The owners and top management of Housing Mortgage Corporation were involved in a massive scheme to defraud To make a Misrepresentation of an existing material fact, knowing it to be false or making it recklessly without regard to whether it is true or false, intending for someone to rely on the misrepresentation and under circumstances in which such person does rely on it to his or HMC's creditors, Specifically, HMC's owners diverted di·vert v. di·vert·ed, di·vert·ing, di·verts v.tr. 1. To turn aside from a course or direction: Traffic was diverted around the scene of the accident. 2. funds front escrow escrow Instrument, such as a deed, money, or property, that constitutes evidence of obligations between two or more parties and is held by a third party. It is delivered by the third party only upon fulfillment of some condition. accounts held by HMC HMC Harvey Mudd College (Claremont, CA) HMC Harborview Medical Center (Seattle, Washington) HMC Hosted Messaging and Collaboration HMC Hoffman Modulation Contrast and misused millions of dollars in loans. The corporate entity and various third-party plaintiffs who extended financing to the company sued Grant Thornton, which had prepared HMC's 1989, 1990 and 1991 audits. They alleged that the firm had failed to investigate and detect suspicious actions by HMC's management which, if explored, would have revealed fraud. The auditor asserted that HMC's owners and management were all involved in a scheme to defraud HMC's creditors and, therefore, no one at HMC relied on the auditor's audit reports. The court ruled for the firm, saying that when owners dominated the corporation's operations, their knowledge of fraud was the same as the corporate plaintiff's knowledge. However, the court took a different view regarding third parties, who in this case were known to the auditors, and allowed them to proceed with an action. HMC had an obligation either to provide these parties with a single audit report or to allow each party to send a team of auditors to review HMC's financial statements. That is, third parties have a right to a proper audit. Since these parties were intended beneficiaries of the auditor's work product, the court rejected the firm's motion to dismiss this claim. This case is significant to accountants because it recognizes management fraud as an auditor defense against a client's action. However, it does allow third parties to bring a case against a firm, if they are specifically named or acknowledged by the auditor. (PNC PNC Purdue University North Central (Westville, Indiana) PnC Point 'n Click PNC Police National Computer PNC People's National Congress (Guyana) PNC People's National Congress Bank, Kentucky, Inc. v Housing Mortgage Corp. 899 F.Supp, 1399) |
|
||||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion