First Securities Company of Chicago Essay

787 Words Feb 22nd, 2008 4 Pages
The critical issue in this case study is the responsibility of auditor. Should Ernst & Ernst be civilly liable for defrauded investors of First Securities Company of Chicago under Securities Exchange Act of 1934 under Rule 10b-5.

 According to Securities Exchange Act of 1934 under Rule 10b-5, plaintiff which was the defrauded investor Hochfelder needed to prove that Ernst & Ernst intentionally manipulate the escrows investors.
 Ernst & Ernst had audited First Securities Company of Chicago for two decades, Ernst & Ernst should have noticed Nay's "mail rule" policy could lead to potential internal control weakness and misleading financial statement.
 Defrauded investors were not properly informed or obtained
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Do you agree? Why or why not?
The mail rule was relevant to the audits because auditor relied upon management's financial information to report their opinions on a company. It's crucial that auditors should have attested every possible or doubtful piece of financial information that could be misrepresented by managements as well.

3. Define negligence as that term has been used in legal cases involving independent auditors. What is the key distinction between negligence and fraud? Between recklessness and fraud? For all three types of professional misconduct, provide an example of such behavior in an audit context.
Negligence is defined as failure to exercise that degree of care a person of ordinary prudence (a reasonable person) would exercise under the same circumstances. The key distinction between negligence and fraud is intention. Recklessness is defined as unconscious intent to deceive. Fraud is a conscious intent to deceive.
Negligence can be found in Tommy O' Connell case, which Tommy was too caught up on his audit on Altamesa's job, he failed to properly supervise his subordinate Carl to make sure he did the right job. Recklessness case can be found in this case where the auditor was aware of the mail rule policy. Rather than challenge this policy, they ignore it. This should have been a warning flag of possible criminal intent. This disregard for this
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