Geiger vs. Willis

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Recommended: Factors That Affect Financial Performance On Internal Controls

In the case of Geiger Co. vs. James Willis and Co., CPAs, PC, the company is attempting to recover $16 million in damages as the result of a scheme to defraud the company. The $16 million in losses is allocated as follows: $8 million to the company itself, $5 million the bank that gave the company a commercial loan, and $3 million to shareholders. Willis did perform the audit with ordinary negligence, which is the reason that the defalcation was not discovered and recovered. The issues of this case are whether the plaintiffs involved may recover from a CPA that has performed the engagement with this degree of negligence. To make this determination, several areas of common and statutory law regarding the liability auditors must be examined. Certified Public Accountants (CPAs) are obligated by contact with their clients to exercise due professional care with any type of engagement they may take on; including auditing of the company’s financial statements (Whittington, R. & Pany, K., 2014). Clients as well as third-party users rely on the information contained in the financial statements for important business, investing, and financing decisions. When the financial information contains misstatements, these parties may suffer significant losses. As a result, the auditing firm may be sued for negligence under common law liability. For a CPA, negligence is failure to exercise due professional care (Whittington, R. & Pany, K., 2014). Common Law Under common law, a client has recourse against auditors for damages caused by negligence. The client may bring tort action of negligence against the CPA even if the work is completed according to the terms of the contract (Whittington, R. & Pany, K., 2014). If the CPA’s work is not consisten... ... middle of paper ... ... examining the different recourses for both Geiger Co. and the third-party users of the audited financial statements, the most logical recourse is the Restatement of Torts (foreseen user) approach. This approach is not used in all jurisdictions, but the courts of many states follow this principle of liability to third parties (Whittington, R. & Pany, K., 2014). Under this approach all users of audited financial statements will be able to recover all, or a portion of, their losses incurred as a result of negligence of the auditor. If this approach is not possible, the next best recourse is the known user approach. Under the known user approach, the company itself is the only party that will benefit. However, the bank and shareholders could still recover a portion of their losses if they can prove that the auditors were grossly negligent in performing their audit.

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