Smith is the auditor for Juniper manufacturing corporation Ltd, a closely held company that has a 30 June balance data. Juniper arranged for a substantial bank loan that depends on the bank receiving by 30 September, audit financial statements that show a current ratio of at least 2 to 1. The loan from the bank is identified in the engagement letter as the reason for the audit. On 25 September, just before the audit report was to be issued, Smith received an anonymous letter on Junipers stationery indicating that a five-year lease by Juniper, at lessee, of a factory building accounted for in the financical statement as an operating lease was, in fact, a capital (financial) lease. The letter stated that there was a secret written agreement with the lessor modifying the lease and creating a capital lease.

Smith confronted the managing director of Juniper, who admitted that a secret agreement existed but said it was necessary to treat the lease as an operating lease in order to meet the current ratio requirement of the pending loan and that on one would ever discover the secret agreement with the lessor. The managing director said that, if Smith didnt issue his report by 30 September, Juniper would sue Smith for substantial damages that would result from not getting the loan. Under this pressure, and because the working papers contained a copy of the fiver-year lease agreement that supported the operating lease treatment, Smith issued his report with an unqualified opinion on 29 September.

In spite of the fact that the loan was received, Juniper went bankrupt within two years. The bank is suing Smith to recover its losses on the loan, and the lessor is suing Smith to recover uncollected rents.

Answer the following questions, setting forth reasons for any conclusions stated.

• Is Smith liable to the bank?
• Is Smith liable to the lessor?
• Is there potential for criminal action against Smith?