Part 10- Corporations, Chapter 45: Securities Regulation, Doc 6 | Summary - Edubirdie

University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
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76

Pages:

1
Author:

bratrochanter

In Escott v. BarChris Construction Corp., Peat, Marwick & Co., as the auditors for BarChris, were held liable under Section 11 of the Securities Act of 1933 for failing to meet the required due diligence standards in their audit and subsequent review of financial disclosures. Key findings included: Peat, Marwick's Audit Process and Oversight   Inexperienced Staff: The audit team included a senior accountant, Berardi, who was not yet a CPA and lacked previous experience in the bowling industry. His inexperience contributed to oversight issues. Material Errors: Berardi failed to recognize that Capitol Lanes and Heavenly Lanes were the same, a critical error that inflated reported sales and misrepresented liabilities. Although he conducted some inquiries, his investigation was deemed inadequate, especially given that certain records showed discrepancies he did not pursue. Subsequent Review (S-1 Review)   Superficial Examination: During the S-1 review in May 1961, Berardi’s work primarily involved confirming figures without deeper investigation into records that might reveal material changes. He relied heavily on assurances from BarChris officers without verifying the accuracy of their statements. Inadequate Inquiry: Berardi's limited review missed critical financial declines and increasing delinquency in BarChris’s receivables. He also failed to scrutinize loans from officers, which were not disclosed accurately in the registration statement. Court’s Conclusion  The court determined that Peat, Marwick did not meet the reasonable investigation standard for due diligence as required by Section 11. They found that the audit and S-1 review overlooked significant red flags. Additionally, the review lacked thorough verification, showing that reliance on internal assurances from the client was insufficient for auditors tasked with ensuring accuracy in public financial disclosures. Peat, Marwick’s failures in this case illustrate the importance of rigorous auditing standards and independent verification of financial records, especially in cases where the audit team may have limited industry-specific experience or when the client presents material complexities or risks in its financial operations.

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