A Public Accountant, Bob Scapens, is the auditor for Youth Inc. This is a private company which fiscal year ends at June 30. Youth arranged for a significant amount of bank loan, which was dependent on the bank's receiving of the audited financial statements latest by September 30, demonstrating a current ratio of at least 2 to 1. Just before the audit report was to be issued, on September 25, Bob received an anonymous letter on Youths stationery indicating that a five-year lease by Youth, as lessee, of a factory building that 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.

Bob confronted the CEO of Youth, 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 CEO said that, if Bob did not issue his report by September 30, Youth would sue Bob for substantial damages that would result from not getting the loan. Under this pressure and because the working papers contained a copy of the five-year lease agreement supporting the operating lease treatment, Bob issued an unqualified opinion/report on September 29. In spite of the fact that the loan was received, Youth went bankrupt. The bank is suing Bob to recover its losses on the loan and the lessor is suing Bob to recover uncollected rents.

1. Do you think Bob liable to the bank? Provide your justification to support your answer.
2. Does Bob liable to the lessor? Explain your answer with rationale.
3. Do you consider Bob worked independently? Provide your arguments in support of your answer.