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Public Accounting Firms and their Liability

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Fred Stern & Company, Inc. - Auditing Case. See attached file for full problem description.

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This solution talks about Fred Stern & Company, Inc.- Auditing Case. It then explores how the extending auditors' liability helps reduce investment losses.
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QUESTION 1
Socialization of investment losses by extending auditors' liability:
Benefits:
To public accounting firms:
1. The accounts that have been audited by the public accounting firms have more credibility;
2. There is a general increase in the fees that are charged by the public accounting firms for the accounts audited;
Audit clients:
1. The clients are assured of more reliable accounts since the auditor does a thorough job.
2. The clients can reasonably assume that the accounts are materially correct once the auditor certified these;
Third-party financial statement users:
1. The investors can look at the company's financial statements with a degree of confidence;
2. Potential investors can expect to make a more reliable investment decision based on the final accounts of companies.
Costs:
To public accounting firms:
1. This places unprecedented responsibility on the auditor to ensure that the accounts are materially correct.
2. The public accounting firms can face such great liability because of law suits that they may have to go into liquidation.
Audit clients:
1. The audit clients will have to pay far greater fees for auditing of their accounts;
2. The audit clients will have to face far intensive and penetrating audit process;
Third-party financial statement users:
? The companies that are being considered for investment will be burdened with additional costs and ultimately the investors will have to pay for the costs by way of reduced ...

Solution provided by:
Hatim Baxamusa, MBA
Education
  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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