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AICPA standards not controlling at trial.


Deloitte, Haskins & Sells conducted audits of the financial statements of Maduff Group, Inc. (MGI) and its subsidiary Maduff Mortgage Corporation (MMC). MMC was in the business of providing construction loans to residential housing builders. Then, when construction was completed, MMC would provide the home purchaser with permanent mortgage financing. The proceeds of the mortgage loans would be used by the buyer to pay the construction loans.

In 1981, MMC began lending to Macal Development. Unknown to MMC, Macal diverted loans to uses other than those permitted by the loan agreement. By the time MMC discovered the fraud, in May 1983, irreparable damage had been done to MMC and it was forced into bankruptcy.

MGI and MMC sued Deloitte for its failure to discover Macal's fraud. The trial court awarded MMC $669,642 and MGI $1,056,982 plus court costs and interest. Deloitte appealed the verdict, arguing the trial court's instruction to the jury failed to state that an auditor is not liable for failure to detect fraud unless it failed to comply with generally accepted accounting standards.

The appellate court ruled that while the American Institute of CPAs standards are useful in determining an auditor's standard of care, GAAS is not the controlling issue in a jury's verdict. The appellate court upheld the trial court's jury instruction and the verdict against Deloitte. (Maduff Mortgage v. Deloitte, Haskins & Sells, 779P.2d 1083)
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Author:Baliga, Wayne J.
Publication:Journal of Accountancy
Date:May 1, 1990
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