Cole & Cole, CPAs, are auditing the financial statements of Consolidated Industries Co. for the year ended December 31, 2011. On February 20, 2012, Cole asked the client to draft an inquiry letter to J. J. Young, Consolidated's outside attorney, to corroborate the information furnished to Cole by management concerning pending and threatened litigation, claims, and assessments and unasserted claims and assessments. On March 6, 2012, C. R. Brown, Consolidated's chief financial officer, gave Cole a draft of the inquiry letter for Cole's review before mailing it to Young.
Required
In a small group, work to describe the omissions, ambiguities, and inappropriate statements and terminology in Brown's letter.
J. J. Young, Attorney at Law
123 Main Street
Any-town, USA
March 6, 2012
Dear J. J. Young:
In connection with an audit of our financial statements at December 31, 2011, and for the year then ended, management of the Company has prepared, and furnished to our auditors, Cole & Cole, CPAs, 456 Broadway, Any-town, USA, a description and evaluation of certain contingencies, including those set forth below involving matters with respect to which you have been engaged and to which you have devoted substantive attention on behalf of the company in the form of legal consultation or representation. Your response should include matters that existed at December 31, 2011. Because of the confidentiality of all these matters, your response may be limited.
In November 2011, an action was brought against the company by an outside salesman alleging breach of contract for sales commissions and pleading a second cause of action for an accounting with respect to claims for fees and commissions. The causes of action claim damages of $300,000 but the company believes it has meritorious defenses to the claims. The possible exposure of the company to a successful judgment on behalf of the plaintiff is slight.
In July 2009, an action was brought against the company by Industrial Manufacturing Co. (Industrial) alleging patent infringement and seeking damages of $20,000,000. The action in U.S. District Court resulted in a decision on October 16, 2011, holding that the company infringed seven Industrial patents and awarded damages of $14,000,000. The company vigorously denies these allegations and has filed an appeal with the U.S. Court of Appeals for the Federal Circuit. The appeal process is expected to take approximately two years, but there is some chance that Industrial may ultimately prevail.
Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information, including an explanation of those matters as to which your views may differ from those stated and an identification of the omission of any pending or threatened litigation, claims, and assessments or a statement that the list of such matters is completed. Your response may be quoted or referred to in the financial statements without further correspondence with you.
You also consulted on various other matters considered pending or threatened litigation. However, you may not comment on these matters because publicizing them may alert potential plaintiffs to the strengths of their cases. In addition, various other matters probable of assertion that have some chance of an unfavorable outcome, as of December 31, 2011, are unasserted claims and assessments.
C. R. Brown
Chief Financial Officer