Auditing

Integrity and Objectivity. In 1997, a disagreement arose between Livent Inc. and its auditor, Deloitte and Touche. Livent, which operated several theaters for live stage production, had sold the naming rights to one of its theaters to AT&T for $12.5 million. The agreement was oral and one of the theaters was under construction. The auditors for Deloitte believed that only a portion of the deal should be included in revenue, but Livent wanted to book the entire $12.5 million. Livent retained Ernst & Young (E&Y) to provide an opinion on the transaction. E&Y's report indicated that all $12.5 million could be recorded as revenue. Deloitte hired Price Waterhouse (currently PricewaterhouseCoopers (PwC) to review the transaction. Price Waterhouse agreed with E&Y and Livent, and Deloitte allowed Livent to book the $12.5 million. In 1998, Livent issued a series of press releases indicating the discovery of significant account irregularities and, later in 1998, declared bankruptcy.

Required: (This is a true case)

Comment on the decision to engage E&Y and Price Waterhouse concerning the $12.5 million transaction. What would your position be on the need for other opinions? What would your position be for the disposition of the transact ion?