Philip Services Corp. was a large Canadian company with shares traded in Canada and the United States. Its extensive operations included recovery and recycling of scrap metals. In 1997, the company filed a prospectus in the United States, from which it raised additional common share capital. The prospectus included unqualified audited financial statements for 1995 and 1996, together with unaudited financial statement information for nine months of 1997.

In 1998, Philip revealed that it was unable to account for a large quantity of its copper inventory, costing about U.S. $80 million. In addition, it disclosed write-offs of almost $200 million in restructuring costs and goodwill write-downs arising from acquisitions of other companies over 1993-1996. Its share price quickly fell from about $25 to pennies per share. The company subsequently went into bankruptcy protection.

A number of lawsuits and charges followed. In 2004, the Royal Canadian Mounted Police announced criminal fraud charges against the head of Philip’s metals group. In 2006, the Ontario Securities Commission announced that it had banned five senior officers of Philip from serving as officers or directors of a public company for periods of up to 12 years. Furthermore, each officer was fined Can. $100,000 to meet the costs of the OSC investigation.

In March 2007, the Canadian arm of Deloitte and Touche, Philip’s auditor, agreed to pay U.S. $50.5 million to settle a class action lawsuit by U.S. investors who claimed to have been misled by the 1997 prospectus. Officers and directors of Philip agreed to pay another $18 million. In December 2007, the Ontario Securities Commission announced a 20-year ban from serving as officer or director of a public company on the head of Philip's metals group. He was also banned from trading securities for 10 years and agreed to pay costs of $125,000.

Required

a. Does the share price reaction to the missing inventory and gains write-offs suggest securities market inefficiency? Explain.

b. Would current value accounting for Philip’s metals inventory have helped to reduce the possibility of losing $80 million of copper inventory? Explain.

c. In retrospect, ceiling tests should have been applied to Philip's capital assets, such as its recorded goodwill, prior to the 1998 write-downs. Explain why ceiling tests may help reduce auditor liability.