Financial Advisors

By: David Margulies

St. John's Law Student

American Bankruptcy Institute Law Review Staff

Applying Indiana law, the Seventh Circuit firmly rejects the idea that a financial auditor has any obligation to investigate circumstances external to a company’s books and records in connection with its determination whether a going concern qualification should be included in an audit report.

[1]

The auditor must, however, consider and factor into its going concern determination information about external matters that it is “told by the firm or otherwise learns.”

[2]

 The trustee’s negligence and breach of contract claims against financial auditor Ernst & Young arose out of the collapse of Taurus Foods, a frozen meat distribution company that was involuntarily forced into bankruptcy two years after the issuance of an allegedly defective audit report.

[3]

The trustee asserted a “deepening insolvency” theory based on the auditor’s failure to include a going-concern qualification, thereby causing the managers of Taurus to refrain from liquidating immediately and losing an additional $3 million through continued operation.

[4]