Academic journal article Journal of Accountancy

Client's Alleged Negligence Does Not Relieve Auditors' Responsibilities

Academic journal article Journal of Accountancy

Client's Alleged Negligence Does Not Relieve Auditors' Responsibilities

Article excerpt

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

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