Financial Advisors

Narrowing the Scope of Auditor Duties

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.


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.”


 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.


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.