Tyler Corp. is insolvent. It has defaulted on the payment of its debts and does not have assets sufficient to satisfy its unsecured creditors. Slade, a supplier of raw materials, is Tyler’s largest unsecured creditor and is suing Tyler’s auditors, Field & Co., CPAs. Slade had extended $2 million of credit to Tyler based on the strength of Tyler’s audited financial statements. Slade’s complaint alleges that the auditors were either (1) negligent in failing to discover and disclose fictitious accounts receivable created by management or (2) committed fraud in connection with Tyler. Field believes that Tyler’s financial statements were prepared in accordance with GAAP and, therefore, its opinion was proper. Slade has established that:

• The accounts receivable were overstated by $10 million.

• Total assets were reported as $24 million, of which accounts receivable were $16 million. 

• The auditors did not follow their own audit program, which required that confirmation requests be sent to an audit sample representing 80% of the total dollar amount of outstanding receivables. Confirmation requests were sent to only 45%.

• The responses that were received represented only 20% of the total dollar amount of outstanding receivables. This was the poorest response in the history of the firm, the next lowest being 60%. The manager in charge of the engagement concluded that further inquiry was necessary. This recommendation was rejected by the partner in charge.

• Field had determined that a $300,000 account receivable from Dion Corp. was nonexistent. Tyler’s explanation was that Dion had reneged on a purchase contract before any products had been shipped. At Field’s request, Tyler made a reversing entry to eliminate this overstatement. However, Field accepted Tyler’s explanation as to this and several similar discrepancies without further inquiry. Slade asserts that Field is liable as a result of both negligence and fraud in conducting the audit.

Required

Discuss Slade’s assertions and the defenses that might be raised by Field, setting forth reasons for any conclusions stated.