Johnson Enterprises, Inc., contracted with the accounting firm of P, A & E to perform an audit of Johnson. The accounting firm performed its duty in a non-negligent, competent manner but failed to discover a novel embezzlement scheme perpetrated by Johnson’s treasurer. Shortly thereafter, Johnson’s treasurer disappeared with $75,000 of the company’s money. Johnson now refuses to pay P, A & E its $20,000 audit fee and is seeking to recover $75,000 from P, A & E.
(a) What are the rights and liabilities of P, A & E and Johnson? Explain.
(b) Would your answer to (a) differ if the scheme were a common embezzlement scheme that Generally Accepted Accounting Standards should have disclosed? Explain.