Analyze the liability of the auditor in providing complex accounting advices.
Explanation of Solution
The given case is a classic example of the failure of the auditor’s advice. The auditor advised the client Company M to invest in the foreign currency, to make profits from the exchange rate. This turned out to be a fiasco, as Company M was unable to make any profits. Even the financing were recorded as sales in the financial statement and was ignored by the auditor.
Thus, the auditors have a legal responsibility for the actions carried out by them. The main causes for the issues are the lack of due care and negligence on the part of the auditor. The auditors must ensure the activities carried out by the companies are in compliance of the GAAP and do not violate the accounting standards. The auditors are expected to be vigilant and detect any negligence and frauds; however, the auditors of Firm P proved to be on the contrary. Thus, based on the impact of the negligence of the auditor on the public interest, they must be held responsible and legally liable.
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