Phelps Development (PD) proposed a new property development that would require major debt financing?

It contacted its bank and several venture capital firms, and was advised that it must first present audited financial statements. Phelps, the CEO of PD, approached its accounting firm and told the partner, Kaur, of PD’s plans and why it needed an audit. Kaur accepted the engagement. The audit was completed and Phelps showed it to several interested parties, including Money Lenders (ML). ML had heard about PD’s proposals and was anxious to join this venture, since it already had several other successful interests in the vicinity. ML provided $500 000 debt financing. Eight months later, PD faced a serious cash crisis and was unable to meet its debts as they fell due. ML’s loan was not repaid. On closer examination, it turned out that the audited financial statements included a serious material misstatement: $250 000 in liabilities were understated. ML is now attempting to recover its losses. Since PD is unable to pay, it seeks compensation from the accounting firm and Kaur as the individual partner responsible for the audit. Present arguments for both parties.

9 months ago - 1 answers