Question
Darfor Sanderson is a large public accounting firm performing audits for clients including public companies. One of its clients is Dendron, a public company in
Darfor Sanderson is a large public accounting firm performing audits for clients including public companies. One of its clients is Dendron, a public company in the energy business. Darfor has a signed engagement letter with Dendron agreeing to professionally perform all necessary work in connection with Dendron's public company audits and filings. Fred Davis is the partner on the Dendron account. Fred deals frequently with the CEO of Dendron who is Sally Strike. Dendron's energy business is down. Darfor is working on the 10-K filing in February and is running up against the mandatory deadline for filing the 10-K. Dendron is not been providing the necessary backup documents for the audit work being performed by Darfor. Sally pressures Fred to have Darfor issue a clean audit opinion on the promise that all backup documents will be provided as soon as possible but after the filing. John agrees to issue the clean opinion on Sally's promise and the financial statements and clean opinion prepared by Darfor go into the 10-K filing which is made on time. Eventually, Dendron provides documents which do not support $10,000,000 of income being taken in the year covered by the 10-K filing. Removing this item will lower the revenue of Dendron by 25%. When the financial statements are revised, this reduction in income has an adverse effect of the financial position of Dendron and the stock of Dendron falls by 50%. Dendron and its shareholders are outraged at Darfor and sue Darfor. Please comment on the legal position of Darfor, Dendron and its shareholders.
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