Auditor's Opinion on the Occurrence of Fraud. Sundback, CGR, is the auditor for Upseerin Manufacturing, a privately owned company in Espoo, Finland, which has a 30 June fiscal year. Upseerin arranged for a substantial bank loan which was dependent upon the bank receiving, by 30 September, audited financial statements which showed a current ratio of at least 2 to 1. On 25 September, just before the audit report was to be issued, Sundback received an anonymous letter on Upseerin’s stationery indicating that a five-year lease by Upseerin, as lessee, of a factory building which was accounted for in the financial statements as an operating lease was in fact a capital lease. The letter stated that there was a secret written agreement with the lessor modifying the lease and creating a capital lease.

Sundback confronted the president of Upseerin who admitted that a secret agreement existed but said it was necessary to treat the lease as an operating lease to meet the current ratio requirement of the pending loan and that nobody would ever discover the secret agreement with the lessor. The president said that if Sundback did not issue her report by 30 September, Upseerin would sue Sundback for substantial damages which would result from not getting the loan. Under this pressure and because the work papers contained a copy of the five-year lease agreement which supported the operating lease treatment, Sundback issued her report with an unqualified opinion on 29 September.

In spite of the fact the loan was received, Upseerin went bankrupt within two years. The bank is suing Sundback to recover its losses on the loan and the lessor is suing Sundback to recover uncollected rents.

Required

Answer the following, setting forth reasons for any conclusions stated.

A. Is Sundback liable to the bank?

B. Is Sundback liable to the lessor?

[AICPA adapted]