WHAT EVERY ACCOUNTANT SHOULD KNOW - ISSUE

Case - Tenants Corp. v. Max Rothenberg & Co 

Every accountant should be aware of the facts and result of the infamous Tenants Corp. v. Max Rothenberg & Co. decision. In Rothenberg, the court found an accountant liable to his client for the failure to discover $237,279 embezzlement during a $600 write-up engagement. The accountant could not prove that he was engaged only to write up the statements; the court concluded that his undertaking to the client involved an audit. In a sense, the accountant's failure to obtain an engagement letter actually created the lawsuit. Much of the profession's anger with Rothenberg focused on the court's assertion that "even if [only] a write-up” was involved a minimal amount of auditing procedures would have revealed whether major expenditures and liabilities of the plaintiff had been met and paid. Thus, according to a digest of the New York Court of Appeals proceeding, the result in this case was the same whether the service contracted for was an audit or just write-up work. Although the court discussed a breach of duty to the plaintiff, it is unclear whether this holding stemmed from a conscious desire to establish a standard of care for write-up services or merely from the accountant's failure to clarify the nature of the agreement The Rothenberg decision was the first case to hold an accountant responsible to his client in an unaudited financial statement engagement. The holding exposed the deficiencies in the promulgated standards for unaudited financial statements, which failed to delineate clearly the procedures to be followed during an unaudited engagement. The court's imposition of a duty to perform some minimum procedures can be explained in light of the clients' expectation of the depth of accountants' association with the financial information. It is unreasonable to believe that the inclusion of an accounting firm's name and the term "certified public accountant" would not produce certain minimum expectations of accuracy and reliability, both in the client and in the third-party user of the financial statements, regardless of the accountants’ disclaimer. The court in Rothenberg emphasized two other significant legal aspects of accounting services that were ignored in the past. First, it analyzed the importance of precision in the accountant's use of technical terminology. Many of the terms used by accountants are generic, but their meaning is clearly established by accounting principles and procedures. It is important for the accountant to use specific accounting terminology correctly in his discussions with both the client and third parties because a deviation from the correct usage may lead to a unjustified expectation that the accountant is increasing his level of responsibility. The second important development in Rothenberg was the enunciation of a "suspicious inquiry" standard for unaudited financial statements. This standard requires the accountant to perform additional investigative procedures even where such procedures were not contemplated originally in the engagement-whenever suspicious circumstances are or should have been discovered. If the accountant fails to investigate further, and if such investigation would have revealed substantial irregularities, he is liable under a theory of negligence. Rothenberg disturbed the accounting profession by permitting a client who had paid only for minor write-up work to bring a negligence action against an accountant and thereby elevate the accountant's responsibility to that of an audit. The profession failed to realize that the decision merely established a necessary standard of performance for the accounting service. A mere disclaimer would no longer protect the accountant. The result was the promulgation of ISRE 2400 [ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS] and ISRS 4410 [COMPILATION ENGAGEMENTS].