Academic journal article Journal of Accountancy

Fraud Can Be an Auditor's Defense

Academic journal article Journal of Accountancy

Fraud Can Be an Auditor's Defense

Article excerpt

A Pennsylvania federal court ruled that business owners who engaged in fraudulent conduct could not sue their auditors, but third parties who relied on the auditor's reports could. The owners and top management of Housing Mortgage Corporation were involved in a massive scheme to defraud HMC's creditors, Specifically, HMC's owners diverted funds front escrow accounts held by HMC and misused millions of dollars in loans. The corporate entity and various third-party plaintiffs who extended financing to the company sued Grant Thornton, which had prepared HMC's 1989, 1990 and 1991 audits. They alleged that the firm had failed to investigate and detect suspicious actions by HMC's management which, if explored, would have revealed fraud.

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. …

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