Chapter 4, Problem 37P

Charles Worthington, the founding and senior partner of a successful and respected public accounting firm, was a highly competent practitioner who always emphasized high professional standards. One of the policies of the firm was that all reports by members or staff be submitted to Worthington for review.

  Recently, Robert Craft, a junior partner in the firm, received a phone call from Herbert Flack, a close personal friend. Flack informed Craft that he, his family, and some friends were planning to create a corporation to engage in various land development ventures; that various members of the family are presently in a partnership (Flack Ventures), which holds some land and other assets; and that the partnership would contribute all its assets to the new corporation and the corporation would assume the liabilities of the partnership.

  Flack asked Craft to prepare a balance sheet of the partnership that he could show to members of his family, who were in the partnership, and to friends, to determine whether they might have an interest in joining in the formation and financing of the new corporation. Flack said he had the partnership general ledger in front of him and proceeded to read to Craft the names of the accounts and their balances at the end of the latest month. Craft took the notes he made during the telephone conversation with Flack, classified and organized the data into a conventional balance sheet, and had his secretary type the balance sheet and an accompanying letter on firm stationery. He did not consult Worthington on this matter or submit this work to him for review.

  The transmittal letter stated: “We have reviewed the books and records of Flack Ventures, a partnership, and have prepared the attached balance sheet at March 31, 20X0. We did not perform an audit in conformity with generally accepted auditing standards, and therefore do not express an opinion on the accompanying balance sheet.” The balance sheet was prominently marked “unaudited.” Craft signed the letter and instructed his secretary to send it to Flack.

Required:

  What legal problems are suggested by these facts? Explain.