Posted: May 9th, 2017

Jensen, Inc., filed suit against a public accounting firm, alleging that the auditors’ negligence was responsible for failure to disclose a large defalcation that had been in process for several years.

Jensen, Inc., filed suit against a public accounting firm, alleging that the auditors’ negligence was responsible for failure to disclose a large defalcation that had been in process for several years. The public accounting firm responded that it may have been negligent, but that Jensen, Inc., was really to blame because it had completely ignored the public accounting firm’s repeated recommendations for improvements in internal control.
Required:
If the public accounting firm was negligent, is it responsible for the loss sustained by the client? Does the failure by Jensen, Inc., to follow the auditors’ recommendation for better internal control have any bearing on the question of liability? Explain.