Audit Malpractice Defense: Four Key Issues

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When a major fraud is discovered in a company, one of the key targets of litigation is usually the independent auditors. Two well-publicized cases in which management or shareholders suing the auditors after fraud was uncovered involve Koss Corp. (auditors Grant Thornton) and Navistar International Corp. (Deloitte & Touche).

Plaintiffs look to the auditors for potential recovery since the auditors typically have deep pockets and large insurance policies. Auditors (and their attorneys) need to know how to defend themselves in these suits.  Naturally, the auditors recognize that audits are supposed to provide reasonable assurance that the financial statements are fairly stated. Continue reading

Navistar v Deloitte: Blame the Auditors for Fraud Committed and Concealed By Employees

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In cases of corporate fraud, including embezzlement, financial statement fraud, earnings management, bribery, and the like, it’s easy to blame the auditors. After all, they have very deep pockets, often with large malpractice policies.

Even though the task of auditors is usually well-defined and agreed-to by shareholders, management, and the board of directors, it doesn’t seem to matter to them that the financial statement auditors aren’t responsible to find fraud during their audits. People quickly forget that the auditors disclaim responsibility for finding fraud multiple times before, during, and after the audits, and that management is ultimately responsible for preventing and detecting fraud in their own companies.

Last week Navistar sued their former auditors, Deloitte & Touche, for fraud, fraudulent concealment, breach of contract, and malpractice.  The lawyers say Deloitte lied about its competency in performing audits, and the company ultimately restated its financial statements for 2002 through 2005.  Whose fault is it that Navistar overstated its pre-tax income by $137 during those years? According to them, Deloitte. Continue reading