Mini Case #2 Subsequently Discovered Facts

On June 1, Sidney Faultless of A. J. Faultless & Co., CPAs, noticed some disturbing information about the firms client, Hopkirk Company. A story in the local paper mentioned the indictment of Tony Baker, whom Faultless knew as the assistant controller at Hopkirk. The charge was mail fraud. Faultless made discreet inquiries with the controller at Hopkirks headquarters and learned that Baker had been speculating in foreign currency futures. In fact, part of Bakers work at Hopkirk involved managing the companys foreign currency. Unfortunately, Baker had violated company policy, lost a small amount of money, and then decided to speculate some more, lost some more, and eventually lost $7 millions of company funds.

The mail fraud was involved in Bakers attempt to cover his activity until he recovered the original losses. Most of the events were in process on March 1, when Faultless had signed and dated the unmodified opinion on Hopkirks financial statements for the year ended on the previous December 31.

Faultless determined that the information probably would affect the decisions of external users and advised Hopkirks chief executive to make the disclosure. She flatly refused to make any disclosure, arguing that the information was immaterial. On June 17, Faultless provided the subsequent information in question to a news reporter, and it was printed in The Wall Street Journal with a statement that the financial statements and accompanying auditors report on the companys financial statements could not be relied on.

Required

1. What are the possible legal effects of the firms actions, if any?