Legal Liability
Introduction and Purpose of Assignment
Any professional – someone who assumes a responsibility to the public – is required to provide a reasonable level of care in the performance of their work. Typically the baseline for professional performance is what the law allows and prohibits. This assignment applies the legal requirements placed on auditors to a marketplace scenario.
Objectives
Theory and Context
Auditors have a responsibility to fulfill both implied and expressed contracts with clients. This includes exercising due care in performing the audit. The auditor also has a duty of care to third parties whose reliance on the auditor’s work should be (and can be) “foreseen” by the auditors. The Securities Act of 1933, the Securities Act of 1934, and the Sarbanes-Oxley Act provide the basis regarding the legal responsibilities of auditors.
Resources
Rutgers accounting web. (2015). Four major sources of auditors’ legal liability [Video file]. Retrieved from https://www.youtube.com/watch?v=NKwR0ifABSY
Instructions
You are a partner in the Denver office of a national public accounting firm. During the audit of Mountain Resources, you learn that this audit client is negotiating to sell some of its unproved oil and gas properties to SuperFund, a large investment company. SuperFund is an audit client of your New York office.
Mountain Resources acquired these properties several years ago at a cost of $15 million. The company drilled several exploratory wells but found no developable resources. Last year, you and Mountain Resources agreed that the value of these unproved properties had been “impaired” as defined in Accounting Standards Codification, section 932-360-35-11. The company wrote the carrying value of the properties down to an estimated realizable value of $9 million and recognized a $6 million loss. You concurred with this treatment and issued an unqualified auditor’s report on the company’s financial statements.
You are now amazed to learn that the sales price for these properties being discussed by Mountain Resources and SuperFund is $42 million. You cannot understand why SuperFund would pay such a high price and you wonder what representations Mountain Resources may have made to SuperFund concerning these properties. The management of Mountain Resources declines to discuss the details of the negotiations with you, calling them “quite delicate” and correctly pointing out that the future sale of these properties will not affect the financial statements currently under audit.
Required:
Summarize the arguments for advising SuperFund (through your New York office) that you consider the properties grossly overpriced at $42 million.
Summarize the arguments for remaining silent and not offering any advice to SuperFund on this matter.
Express your personal opinion as to the course of action you should take. Indicate which arguments from part (a) or part (b) most influenced your decision.
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