ACCT 4160 Auditing Ethics Case Study: Auditor Malpractice On November 28, 2018, Horizontal Pharmaceuticals Inc. and an affiliated company sued their external financial statement auditor, Jerry & Garcia LLP ("J&G LLP"), in New York state court for alleged accountant malpractice, claiming the firm's false accusations of fraudulent conduct scrapped a public company's plans to acquire Horizontal for more than $75 million. Horizontal is a privately owned company that sells niche prescription drugs geared toward men's health and pain management. Quadratic Laboratories (QLI) sells and markets generic drugs. J&G LLP was auditing the 2017 financial statements of Horizontal and QLI, which are owned by the same three partners, when it abruptly suspended that review because of supposedly troubling items that two whistleblowers brought to the firm's attention, according to the complaint, which was filed October 31 in a County Superior Court. J&G LLP insisted that Horizontal hire independent counsel and conduct an internal investigation with a forensic audit, the complaint said. Horizontal agreed to those steps, but J&G LLP eventually notified Horizontal that it was resigning rather than finishing its work, according to the complaint Horizontal's complaint said that the results of the forensic audit discovered that no money was being stolen from the company and that no improper conduct was taking place. The revelation that J&G LLP resigned from the 2017 audit and the allegations of potential criminal conduct and financial improprieties that the auditor passed on to the audit committee left the acquisition for dead, the complaint said. The public company found another pharmaceutical company to acquire. The deal would have helped rapidly grow Horizontal's business and established a revenue stream for the company of more than $800 million, the complaint contended. "J&G LLP knew the deal would be final once the 2017 audit was completed. Without J&G LLP's interference in concocting a series of false, negligent statements regarding Horizontal's financials, the 2017 audit would have been issued and the deal completed." Horizontal has asked for $300 million or more in damages on multiple counts, including accounting malpractice and breach of fiduciary duty. J&G LLP also demanded and received $120,000 for all of its invoiced services before resigning, according to the complaint, which seeks back those funds as well. J&G LLP's allegedly slanted statements involved accusations that Horizontal was pilfering company funds through two LLCs, inappropriately paying company employees through car allowances, committing fraud by having an owner's father as tax auditor, and paying an owner's wife off the books, according to the complaint. The firm also falsely claimed Horizontal's books were in terrible shape and that its management was unreliable, the complaint said. "A subsequent forensic audit initially to assuage J&G LLP was ultimately completed ... which found: None of these items had merit nor did they consider any resolution items justified to engender J&G LLP's resignation; that J&G LLP was well aware of the nature prior to its supposed whistleblower disclosures of the items, and that many of these items were in the process of being resolved based on advice provided by J&G LLP as early as May 2017, the complaint said. Questions 1. Do you believe J&G LLP breached its fiduciary duty to Horizontal Pharmaceuticals in this case? Explain. 2. Do you believe J&G LLP was guilty of malpractice as alleged by Horizontal? Why or why not? 3. When should an auditor withdraw from an engagement? Do you believe J&G LLP was justified in resigning from the Horizontal Pharmaceuticals engagement? Do you believe J&G LLP acted ethically in this regard? ACCT 4160 Auditing Ethics Case Study: Auditor Malpractice On November 28, 2018, Horizontal Pharmaceuticals Inc. and an affiliated company sued their external financial statement auditor, Jerry & Garcia LLP ("J&G LLP"), in New York state court for alleged accountant malpractice, claiming the firm's false accusations of fraudulent conduct scrapped a public company's plans to acquire Horizontal for more than $75 million. Horizontal is a privately owned company that sells niche prescription drugs geared toward men's health and pain management. Quadratic Laboratories (QLI) sells and markets generic drugs. J&G LLP was auditing the 2017 financial statements of Horizontal and QLI, which are owned by the same three partners, when it abruptly suspended that review because of supposedly troubling items that two whistleblowers brought to the firm's attention, according to the complaint, which was filed October 31 in a County Superior Court. J&G LLP insisted that Horizontal hire independent counsel and conduct an internal investigation with a forensic audit, the complaint said. Horizontal agreed to those steps, but J&G LLP eventually notified Horizontal that it was resigning rather than finishing its work, according to the complaint Horizontal's complaint said that the results of the forensic audit discovered that no money was being stolen from the company and that no improper conduct was taking place. The revelation that J&G LLP resigned from the 2017 audit and the allegations of potential criminal conduct and financial improprieties that the auditor passed on to the audit committee left the acquisition for dead, the complaint said. The public company found another pharmaceutical company to acquire. The deal would have helped rapidly grow Horizontal's business and established a revenue stream for the company of more than $800 million, the complaint contended. "J&G LLP knew the deal would be final once the 2017 audit was completed. Without J&G LLP's interference in concocting a series of false, negligent statements regarding Horizontal's financials, the 2017 audit would have been issued and the deal completed." Horizontal has asked for $300 million or more in damages on multiple counts, including accounting malpractice and breach of fiduciary duty. J&G LLP also demanded and received $120,000 for all of its invoiced services before resigning, according to the complaint, which seeks back those funds as well. J&G LLP's allegedly slanted statements involved accusations that Horizontal was pilfering company funds through two LLCs, inappropriately paying company employees through car allowances, committing fraud by having an owner's father as tax auditor, and paying an owner's wife off the books, according to the complaint. The firm also falsely claimed Horizontal's books were in terrible shape and that its management was unreliable, the complaint said. "A subsequent forensic audit initially to assuage J&G LLP was ultimately completed ... which found: None of these items had merit nor did they consider any resolution items justified to engender J&G LLP's resignation; that J&G LLP was well aware of the nature prior to its supposed whistleblower disclosures of the items, and that many of these items were in the process of being resolved based on advice provided by J&G LLP as early as May 2017, the complaint said. Questions 1. Do you believe J&G LLP breached its fiduciary duty to Horizontal Pharmaceuticals in this case? Explain. 2. Do you believe J&G LLP was guilty of malpractice as alleged by Horizontal? Why or why not? 3. When should an auditor withdraw from an engagement? Do you believe J&G LLP was justified in resigning from the Horizontal Pharmaceuticals engagement? Do you believe J&G LLP acted ethically in this regard