Bruer Sportswear, Inc. is a small privately-owned distributor of men’s athletic apparel located in Portland, Oregon. The company was founded by Drake Bruer, who serves as the company’s President and Chief Executive Officer. He is actively involved in the day-to-day operations of the business and has been instrumental in facilitating the company’s merchandising success and recent growth. Drake recognizes, however, his lack of sophistication in the areas of accounting and financial matters. He relies upon the financial expertise of his corporate Treasurer and Chief Financial Officer, Janet Kourier and her staff, as well as the CPA firm of Duncan & Blavich LLP.
Early in 2008, Drake Bruer discovered a troubling note in the company’s suggestion box. The note suggested wrongdoing within the company’s accounting function, but provided no further information regarding the circumstances or perpetrator. The note was unsigned. Drake decided to turn the matter over to Duncan & Blavich and engage them to perform more detailed services; however, he avoided telling the firm about the note from the suggestion box. Since the note was anonymous, he wondered about its legitimacy. Therefore, he decided to wait and see if the work of Duncan & Blavich turned up anything suspicious.
Duncan & Blavich had been serving Bruer Sportswear since the company’s inception. Since Janet Kourier was hired, the firm’s services consisted of compilation work and tax return preparation. Now Drake decided that it was time for audited financial statements. Besides, he had in mind that the company may make an initial public offering at some point in the future, so it seemed like a good time to begin audit work so that the company would be ready with the necessary audited financial statements at the appropriate time. A standard audit engagement letter was signed by both parties.
Duncan & Blavich performed a financial statement audit in accordance with generally accepted auditing standards for the year ended December 31, 2009.They issued an unqualified opinion on these financial statements.
In mid-2010, it was discovered that Janet Kourier had been stealing cash from the company’s operating account through the company’s purchasing and payroll functions. The transactions were cleverly concealed. Individually, the dollar amounts of these transactions were relatively small dollar; yet they had occurred repeatedly over a two-year period to total over $500,000.
Bruer Sportswear is suing Duncan & Blavich for the amount of the embezzlement. Duncan & Blavich denies liability and is vigorously defending the propriety of its audit work.
a. Will Bruer Sportswear prevail in its claim against its audit firm? Why or why not?
b. Does the company or its president have any responsibility for the matter? Explain.
c. Has Duncan & Blavich failed in its professional responsibilities by not communicating sufficiently with Bruer Sportswear on the lack of assurance provided by nonaudit services?