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Client's alleged negligence does not relieve auditors' responsibilities.

The Supreme Court of New York, on a motion for summary judgment, ruled the alleged negligence of a Peat Marwick Main & Co. client in failing to detect fraud by its credit manager and vice-president did not absolve the accounting firm from its duty to detect fraud while auditing the client.

Mocatta Metals Corp. is a precious metals dealer trading in metals and coins. Its former credit manager, a coin trader and a client were engaged in a fraudulent scheme that resulted in millions of dollars of losses to Mocatta. The credit manager allowed the client's receivable balance to increase from $2,300,000 in 1982 to $19 million in 1984. When the fraud was discovered and the account liquidated, it was discovered the receivable balance of over $8 million was secured by collateral valued at $2 million. The manager, trader and client were convicted and served federal prison terms for their crimes.

The accounting firm performed audits of Mocatta for the fiscal years ended April 30, 1982-84. Mocatta alleged Peat failed to discover or disclose that

1. Interest was not being charged on the receivable account balance.

2. The account was uncollateralized.

3. Unauthorized withdrawals had been made from its metals and coins subsidiary.

In its defense, Peat alleged Mocatta knew all or almost all the matters Peat allegedly failed to discover or disclose, and therefore Peat could not be the proximate cause of Mocatta's losses.

In ruling against Peat's motion for summary judgment, the court said that while Peat demonstrated certain Mocatta employees had knowledge of some irregularities, knowledge by different people of various information is insufficient to defeat Mocatta's claim. Negligent accountants are not free from liability because their client also conducted business in a negligent manner. One of the purposes of an audit is to detect problems that result from a client's negligence. (Mocatta Metals Corp. v. Peat, Marwick, Main & Co., case no. 23965/88, Supreme Court of New York County, 4/8/91)
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Title Annotation:New York
Author:Baliga, Wayne J.
Publication:Journal of Accountancy
Date:Aug 1, 1991
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