Fraud can be an auditor's defense.
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 Bank, Kentucky, Inc. v Housing Mortgage Corp. 899 F.Supp, 1399)
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|Title Annotation:||PNC Bank, Kentucky, Inc. v. Housing Mortgage Corp.|
|Publication:||Journal of Accountancy|
|Article Type:||Brief Article|
|Date:||Jul 1, 1996|
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