Academic journal article Journal of Accountancy

Applicability of Arbitration to Audit Engagements

Academic journal article Journal of Accountancy

Applicability of Arbitration to Audit Engagements

Article excerpt

APPLICABILITY OF ARBITRATION TO AUDIT ENGAGEMENTS

A recent decision in California holds the promise of granting auditors immunity from lawsuits in certain situations. The case began when the controlling shareholder of the Federated and Atari Corporation Schwartz, and Atari Corporation retained Coopers & Lybrand to conduct an audit of Federated's September 30, 1987, balance sheet. Coopers was retained specifically to determine whether any balance sheet adjustments were necessary to value the transaction properly.

All three parties entered into a binding agreement requiring that the audit "be a conclusive determination of the matters covered" and "be binding upon the parties and shall not be contested by any of them." In the event of nonperformance by the parties, the nonbreaching party can obtain judgment "in any court of competent jurisdiction" and is entitled to costs and attorney's fees.

After Coopers issued its final report, the firm was sued by Schwartz. Schwartz alleged Coopers overstated balance sheet adjustments by $19 million, which caused Schwartz to pay $5 million to Atari. …

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