Robert D. Potts was a partner at Deloitte & Touche. He served as the concurring partner for audits of Kahler Corp. Kahler owned the University Park hotel, which it listed in its financial statements as “an asset held for sale” although the hotel did not meet these standards. As a result, one year Kahler showed a net gain instead of a $1 million loss, and the next year its loss was $1.8 million instead of $2.8 million. Potts knew that this property did not meet the standards necessary to count as an asset held for sale. On Potts’s suggestion, the lead auditor met with Kahler’s internal audit committee, and afterwards assured Potts that Kahler was committed to meeting the necessary standards. Potts made no further investigation and signed off on the Kahler audits. When the SEC discovered what Potts had done, it suspended him from practice before the agency. Potts appealed.

Holding: Potts’s suspension was upheld. Kahler’s accounting treatment of the hotel made all the difference between showing a profit and showing a loss. Despite this importance, and despite signals that Kahler’s treatment of the hotel was suspect, Potts approved the audits. The court held that Potts’s conduct amounted to an egregious refusal to see the obvious, or to investigate the doubtful.

Questions: 

1. Was Potts responsible for the Kahler audit?

2. Did he know there was a problem with the Kahler audit?

3. Why would the company want to do that?

4. What did Potts do?

5. What else did he do?

6. What should Potts have done?

7. Why was Potts so careless?