Magazine article The CPA Journal

Ripley's Believe It or Not

Magazine article The CPA Journal

Ripley's Believe It or Not

Article excerpt

The story begins with a partner in a West Coast office of a multinational accounting firm. For purposes of this story, I will call the partner, John Smith. Mr. Smith is a conscientious CPA-hardworking, dedicated, bright. Smith is a credit to his profession.

Mr. Smith's firm is auditing the financial statements of a medical transportation company. Smith, the partner-in-charge on the account, obtains the requisite engagement letter, thereby allowing his firm to proceed with the audit. During numerous contacts with the client, Smith learns of management's need to report improved financial results in order to obtain additional equity funding. Indeed, the unaudited financial statements reflected those much needed financial results by showing a handsome profit. However, as a result of the audit, Smith proposed adjusting entries that would turn this profit into a substantial loss.

As with any client, Smith decides to present management with his proposed adjusting entries. Unfortunately, management refuses, and proceeds to threaten Smith, should he insist on their acceptance of his suggested adjusting entries. Undaunted, Smith allows his client every opportunity to either accept his adjustments or provide additional evidentiary information to refute his proposed entries. Not only did management fail to provide the additional evidence, but they further admonish Smith by once more issuing a threat. Smith, having been left with no other choice, informs management of his decision to resign from the engagement, Whereupon, the client brings suit against Smith and his firm, alleging breach of contract for not issuing an audit report.

Sounds like a script taken from the back lots of Hollywood? Who would believe this story-a client, intentionally misstating their own financial statements? The auditors discover the errors but the client refuses to change the financials. The auditors resign when the client threatens them and then the client sues the auditors for breach of contract. The sad part about this screenplay is that it's all true. As preposterous as this story sounds, except for the names, the events as stated above actually occurred. What makes this story even worse is that the accountants were found liable and the client was awarded a judgment of $10 million.

The auditors eventually appealed the decision in the State of California's Court of Appeals. …

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