The public accounting firm of Andre, Mathieu & Paquette (AMP) was expanding very rapidly. Consequently, it hired several junior accountants, including Jim Small. The partners of the firm eventually became dissatisfied with Jim’s production and warned him that they would be forced to terminate him unless his output increased significantly.
At that time, Jim was engaged in audits of several clients. He decided that to avoid being fired, he would reduce or omit entirely some of the standard auditing procedures listed in audit programs prepared by the partners. One of the public accounting firm’s clients, Newell Corporation, was in serious financial difficulty and had adjusted several of the accounts being examined by Jim to appear financially sound. Jim prepared fictitious working papers in his home at night to support the supposed completion of auditing procedures assigned to him, although he, in fact, did not examine the adjusting entries. The public accounting firm rendered an unqualified opinion on Newell’s financial statements, which were grossly misstated. Several creditors, relying on the audited financial statements, subsequently extended large sums of money to Newell Corporation.
REQUIRED
Would the public accounting firm be liable to the creditors who extended the money because of their reliance on the erroneous financial statements if Newell Corporation should fail to pay them? Explain.