Printer Friendly

Auditors granted summary judgment in securities case.

The U.S. District Court for the Northern District of California granted summary judgment to Deloitte & Touche in a securities fraud action filed by investors in a public offering of stock by Software Tool-works, Inc.

Deloitte audited the financial statements for the fiscal year ended March 31, 1990. These statements were incorporated in Toolworks' July 1990 prospectus for its public stock offering.

The investors alleged the financial statements had improperly included under the revenue category sales of software that were subject to price-protection allowances, sales of software that Deloitte knew or should have known would be returned by vendors and slow-moving and obsolete software in inventory that Deloitte knew or should have known was subject to writedown.

In granting summary judgment to Deloitte, the court noted the accounting firm performed extensive testing of Toolworks' revenue recognition policy. Pointing out a few cases in which bits of negative information were presented to Deloitte is not sufficient to establish actual knowledge or recklessness, the court ruled.

In the court's view, all audits present some adverse information. Deloitte, when presented with negative information, investigated and acted on it.

Moreover, the fact that in some cases Deloitte dismissed negative information because it was outweighed by contrary information may have presented a case of bad judgment, the court held. However, such instances did not represent the extreme departure from the standards of ordinary care that must be established to sustain a securities fraud action. (In re Software Toolworks, Inc. Securities Litigation, 92 Daily Journal D.A.R. 6617, no. C-90-2906 FMS U.S. District Court for the Northern District of California)

Editor's note: Thanks to Dennis Zaragoza of Wild & Zaragoza for providing the Toolworks case.

Edited by Wayne Baliga, CPA, JD, vice-president, AON Corp.
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Dec 1, 1992
Previous Article:Fiduciary relationship exists between investor and adviser.
Next Article:Tax changes in energy bill.

Related Articles
Applicability of arbitration to audit engagements.
Auditor not responsible for client's 'deepening insolvency.' (Brief Article)
Court rules Bily decision is retroactive.
How directors and auditors can improve corporate governance.
Tort reform revolution.
Third parties can rely on auditor's work.
Who got sued?
KPMG Peat Marwick finally prevails in 1991 Kansas audit case.
Companies sensing a big chill with auditors: the outside auditor-corporate client relationship has changed considerably in the advent of...
AICPA files briefs in securities and malpractice cases.

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters