In early 2014, Diamond Foods Inc. paid $5 million to settle its accounting fraud. The company’s CFO manipulated the cost of walnuts by pushing some of the cost to a later period. This practice led to higher income and misled investors in 2010 and 2011. Diamond restated its 2012 financial statements.
In reviewing the SEC filing of Diamond Foods, Inc., I found that its auditors at first issued an unqualified opinion on its 2012 financial statements. “In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Diamond Foods, Inc. and subsidiaries as of July 31, 2012 and 2011 …”
However, due to the discovery of the ...view middle of the document...
As a public company, the auditors of this company should know that the users are the general public “foreseeable users” that invested in Diamond Foods, Inc. because it relied on the audit report on the financial statements where the income was falsely overstated. Thus it may be legally liable to investors of the company. In certain cases, the firm may be liable to vendors of the company who sustained substantial loss due to its reliance on the profitable position reported by the audited financial statements. However, the firm may find relief under Ultramares doctrine. The auditors may also seek relief using non-negligent performance, however, it may be hard in this case.
First of all, the auditors already know there is “possibility of collusion or improper management override of controls”, during its planning, it should have increased business risk for this audit, and increase its normal procedures.
Second, period cut off should one of its primary procedures in order to ensure the transactions are recorded in the right period. The audit firm might not have obtained sufficient and appropriate audit evidence to support its opinion. The fact that a thorough examination of the company’s walnut invoices revealed the scandal may indicate that the audit firm’s audit procedure was not sufficient. Being a long-term auditor of the company, the auditors should maintain its professional skepticism, by maintaining a questioning mind but still examine/verify enough evidence to support its opinions. When an audit firm, sometimes even the same personnel, may have been doing the audits for the same company for a long time. It’s easy to just trust and without verifying evidence or enough evidence. It’s true that judgment is involved in making those decisions, however, an auditor’s professional standards should be upheld at all times and unless the auditors are reasonably assured, it should not tell the public that.
When it comes to the responsibility of management and the audit...