For most of his life, New York City businessman I. Jerome Riker was a powerful man with an extensive network of influential friends and business associates. Probably the most influential of Riker's friends was Roy M. Cohn. Cohn served as the prosecuting attorney in the Julius and Ethel Rosenberg espionage trial following World War II. Cohn later worked as the chief legal counsel for Senator Joseph McCarthy during the infamous McCarthy hearings of the mid-1950s in the U.S. Senate. One of the most important power brokers of his time, Cohn had close personal ties to numerous government officials, including J. Edgar Hoover and, years later, Ronald Reagan. Riker benefited greatly from his friendship with Cohn. Cohn steered business deals Riker's way and, for a time, was a co-owner with Riker of American Funding Corporation, a large finance company.

Riker's principal business interests were in the real estate industry. From 1926 through 1965, he served as president of Riker \& Company, one of the largest real estate investment companies in New York City. Riker \& Co. managed some of the most expensive and exclusive residential properties in the United States, the elegant cooperative apartment buildings that line Park Avenue and Fifth Avenue on the upper east side of Manhattan Island. Besides being prominent in the inner circles of the Manhattan business and civic communities, Riker counted as friends many of the socialites who inhabited the posh Hamptons communities of Long Island. In fact, Riker's most prized real estate property was the glitzy Bath and Tennis Club of Westhampton, Long Island. Riker both managed that property and was its principal stockholder.

During the early 1960s, Riker began embezzling cash from the trust funds of several of the cooperatives his firm managed. Riker used this cash to finance a wide array of capital improvement projects at the Westhampton club. In March 1965, the New York State Supreme Court ordered Riker \& Company to cease operations, charging that the firm had been commingling its funds with those of its clients. Three months later, prosecutors indicted Riker on 13 counts of grand larceny. The criminal indictment alleged that Riker stole nearly \(\$ 1\) million from the trust funds of cooperatives previously managed by his firm.

In November 1965, Riker pleaded guilty to the charges filed against him. Judge Gerald Culkin of the New York State Supreme Court gave Riker a suspended sentence and indefinite probation. Judge Culkin defended the light sentence by explaining that Riker had paid back approximately \(\$ 20,000\) of the stolen funds. Riker had intended to repay all the stolen funds, Judge Culkin noted, but had been prevented from doing so by a series of poor investments.
One of the cooperatives from which Riker embezzled funds was the 1136 Tenants Corporation, located at 1136 Fifth Avenue on Manhattan. Riker admitted stealing approximately \(\$ 130,000\) from that cooperative's trust funds. Because they were unable to recover the stolen funds from Riker, the tenants filed a civil suit against Max Rothenberg \& Company, the accounting firm that had prepared the cooperative's annual financial statements and tax returns. The principal allegation leveled at the accounting firm was that it should have discovered, and reported to the tenants, Riker's embezzlement from the cooperative's trust funds.
The trial and subsequent appeals in the 1136 Tenants case focused on the contractual agreement between the tenants and Max Rothenberg \& Company. This contract was never reduced to writing. Instead, the contract was simply an oral agreement between a partner of the accounting firm and I. Jerome Riker. The plaintiffs alleged that Riker, their agent, retained the accounting firm to audit the trust funds of 1136 Tenants Corporation and to prepare its annual tax returns. The accounting firm disputed this contention. Rothenberg \& Co. maintained that, other than the preparation of tax returns, the oral agreement with Riker was simply to perform so-called write-up, or bookkeeping, services for the cooperative. The courts found that the oral agreement between Riker and the Rothenberg firm, in fact, had been for the performance of write-up services rather than an audit.
The affidavits and examination before trial ... show that the plaintiff orally employed defendant firm of accountants to "write up" its books from statements and facts submitted from time to time to the defendant by plaintiff's managing agent, Riker; and defendant made periodic reports thereof in regular accounting form to the plaintiff and its shareholders. \({ }^{1}\)
To conceal his embezzlement from the tenants' trust funds, Riker routinely recorded bogus transactions in the cooperative's accounting records. He also occasionally forged accounting documents to authenticate these transactions. As noted by the court, Rothenberg \& Co. relied on the information supplied to them by Riker to prepare annual financial statements for the 1136 Tenants Corporation. The accounting firm freely admitted that had it audited the cooperative's trust funds, the irregularities perpetrated by Riker would almost certainly have been uncovered.
Although Rothenberg \& Co. had agreed to provide only write-up services to the 1136 Tenants Corporation, the court ruled that the firm had a professional obligation to inform the tenants of certain "suspicious" matters it uncovered. The court was referring principally to a workpaper entitled "Missing Invoices" that an accountant with the Rothenberg firm prepared while compiling financial statements for 1136 Tenants. This workpaper detailed more than \(\$ 44,000\) of expensesexpenses for which the accountant could find no supporting documentation. As established by the plaintiffs, Riker fabricated these expenses to extract cash from the cooperative's trust funds.
Also damaging to the Rothenberg firm during the trial was an admission by one of its partners that the annual 1136 Tenants engagement involved more than the provision of write-up services. The partner testified that his subordinates reviewed bank statements and other documentary evidence during those engagements. Apparently, the Rothenberg accountants reviewed these documents to corroborate the financial data in the accounting records maintained for the cooperative's trust funds.
The plaintiffs' legal counsel also established that the tenants had some justification for believing that the Rothenberg firm was providing more than just write-up services. For instance, an income statement compiled for the cooperative by Rothenberg personnel included an expense item labeled simply "Audit." Additionally, the court pointed out that the accounting firm had failed to issue a definitive disclaimer each year indicating that the cooperative's financial statements had not been audited.
The original court that heard the 1136 Tenants case ruled in favor of the plaintiffs, awarding them a judgment exceeding \(\$ 230,000\). This judgment startled the accounting profession since the Rothenberg firm had received an annual fee of only \(\$ 600\) for the services provided to the tenants. A New York appellate court upheld the judgment against the accounting firm by a 3 to 2 margin. The two judges who voted to repeal the lower court's decision believed that the Rothenberg firm had not misled the tenants regarding the nature of its professional services. The other three appellate judges concluded that the accounting firm was largely responsible for the ambiguity surrounding the specific nature of those services. This ambiguity, when coupled with the suspicious circumstances uncovered by the accounting firm but not disclosed to the tenants, swayed these three judges to vote in favor of upholding the lower court's decision.

QUESTIONS
1. The court decisions handed down in the 1136 Tenants case suggest that accountants have a responsibility to precisely specify to their clients the type of professional service to be provided during an engagement. Identify the current technical standards that focus on this issue. What are the principal requirements of these standards? Do the standards require that a written engagement letter be obtained by an accounting firm providing professional services to a client?
2. What steps should CPAs take when they discover financial irregularities during a compilation engagement? Are CPAs required to inform client management when they discover irregularities during such an engagement? If so, briefly summarize the nature of the communications that a CPA should make to the client in this context.
3. In recent years, the product line of services that accounting firms provide has expanded significantly. Identify the principal auditing and auditing-related services that accountants provide and briefly compare and contrast these services.

4. Recent academic research suggests that the expanding product line of auditing and auditing-related services that accounting firms offer to their clients may be confusing to the users of financial statements. What measures could the profession adopt to eliminate or reduce this confusion? Would these measures, if in place at the time, have limited the legal exposure of Rothenberg \& Co. in the 1136 Tenants case?