Helmut & Co., a public accounting firm, was the new auditor of Mountain Ltd., a private company in the farm equipment and supply business.
In early February 2015, Helmut & Co. began the audit for the year ended December 31, 2014. The audit was to be run by Frost, a senior who had just joined Helmut from another firm. Frost was to be assisted by two juniors.
Mountain, the president of Mountain Ltd., approached Frost and said that the Bank of Trail was prepared to increase its loan to Mountain upon receipt of the 2014 financial statements.
The juniors were assigned the accounts receivable
and inventory sections, both of which were significant in relation to total assets, while Frost concentrated on the income statement and the remaining balance sheet
accounts. The audit was finished quickly, and after a cursory review of the file and statements by Helmut, senior partner of Helmut & Co., the signed auditor's report was appended to the financial statements, which were delivered to Mountain, which, in turn, sent them to the bank.
The bank increased the loan significantly, principally on the basis of the very successful year the company had enjoyed despite the fact that the farm supply business was depressed. Several months later, Mountain Ltd. made an assignment in bankruptcy. The trustee found that many accounts receivable
were still outstanding from the balance sheet
date and that inventory on hand included substantial quantities of obsolete and damaged goods that had been included in the year-end inventory at cost. In addition, the year-end inventory amount included inventory that had been sold prior to the year-end. Bank of Trail sued Helmut & Co. for negligence.
Discuss Helmut & Co.'s defence. Is lack of privity a defence in this case? Was Helmut & Co. negligent? Explain your answer fully.