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I.

Identification of Issues
1.1 professional negligence it happened when the auditor of Deloitte & Touche withdraw
prematurely from the auditing engagement but this suit of MedTrans was reversed because it was
concluded that the trial court prejudicially erred in giving an incorrect jury instruction on the
standard governing defendants' resignation from their professional engagement with Medtrans

1.2 breach of contract - breaching the parties' engagement contract by not issuing an audit
opinion to MedTrans but this was also reversed because it was concluded that the record was devoid
of substantial evidence that defendants caused Medtrans's alleged damages for breach of contract

1.3 negligent interference with prospective economic advantage - negligently interfering with
Medtrans's prospective economic advantages with successor auditors and a potential investor by
making defamatory statements impugning the honesty of Medtrans's management but this was also
reversed because it was concluded that the jury instruction on negligent interference with economic
advantage omitted the tort's "independent wrong" material element

II. Connections to Theoretical and Empirical Research


2.1 Deloitte & Touches expert Kleiner testified that the auditors resignation was permissible
under professional standards once they lost faith in the honesty of Medtrans's senior management
and thus could not complete the audit. Kleiner also testified that the of the auditors resignation was
required under professional standards once their independence was compromised by Roberts's
threats, CEO of MedTrans.

2.2 On Medtrans's claim for negligent interference with prospective economic advantage
against the auditors, the jury by special verdict found: Medtrans had economic relationships with
third parties Blair, Ernst & Young, and Peat Marwick containing probable future economic benefit or
advantage to Medtrans; at least one auditor knew of the existence of those relationships; at least
one auditor negligently engaged in acts or conduct while aware or constructively aware that those
acts or conduct would interfere with or disrupt those relationships; those relationships were actually
interfered with or disrupted; Medtrans suffered damages caused by acts of the auditors designed to
interfere with or disrupt those relationships; and Medtrans was not contributorily negligent with
regard to its claim. fn. 7

III. Analysis and Evaluation


Instructing the jury on the duration of defendants' professional responsibility, the court
stated: "Once an accountant has undertaken to serve a client, the employment and duty as an
accountant continues until ended by consent or request of the client or the accountant withdraws
from the employment, if it does not unduly jeopardize the interest of the client, after giving the
client notice and a reasonable opportunity to employ another accountant or the matter for which
the person was employed has been concluded." (See BAJI No. 6.37.3.) fn. 8 [62 Cal. App. 4th 426]
An auditor's "independence may be impaired whenever the member and the member's
client company or its management are in threatened or actual positions of material adverse interests
by reason of threatened or actual litigation." (2 AICPA Professional Standards, supra, at 101.08.)
"An expressed intention by the present management to commence litigation against the member
alleging deficiencies in audit work for the client would be considered to impair independence if the
auditor concludes that it is probable that such a claim will be filed."
FN 10. The trial court instructed the jury in the language of BAJI No. 6.37: "In performing
professional services for a client, an accountant has the duty to have that degree of learning and skill
ordinarily possessed by reputable accountant[s], practicing in the same or a similar locality and
under similar circumstances. It is a further duty to use the care and skill ordinarily used in like cases
by reputable members of the same profession practicing in the same or a similar locality under
similar circumstances, and to use reasonable diligence and best judgment in the exercise of
professional skill and in the application of learning, in an effort to accomplish the purpose for which
the professional was employed. A failure to fulfill any such duty is negligence."
The court also instructed the jury in the language of BAJI No. 6.37.1: "It is the duty of an
accountant who holds himself or herself out as a specialist in a particular field of accounting, to have
the knowledge and skill ordinarily possessed, and to use the care and skill ordinarily used, by
reputable specialists practicing in the same field and in the same or a similar locality and under
similar circumstances. A failure to fulfill any such duty is negligence."

IV. Alternative Courses of Action


Alternative Course of Action 1:
Ask the authorities if it is possible to have further investigation for MedTrans abusive acts
The primary emphasis of Medtrans's counsel's arguments was also that Medtrans was
harmed by defendants' resignation from the audit. With the preceeding statement, it is not enough
that the jury reversed its decision hence, they should also look at the bigger picture of what have had
happened.
Pros:
Fair and just judgment for everyone involved;
Proper penalization to the people responsible for fraud;
The stricter, the better.

Cons:
Maybe it will be more costly for the firm;
Maybe there will be more disagreements between the firm and MedTrans.

Alternative Course of Action 2:


Putting up penalty for violators
In this action, CPAs will be quiet threatened in a good way. They will be now cautious with
their doings because of the said penalty. The case was all about violation so it is just fair enough to
put up penalties.
The penalty will be set by the higher regulators of CPA and the amount will depend on the
violation. The heavier the violation, the higher the amount of penalty. The proceeds will be used
maybe for scholarships to those aspirants to become CPA or will be of help in some programs of
organizations related to accountancy.

Pros:
Auditors will be careful with their work.

Cons:
Persons responsible for fraud will be embarrassed.
Being honest depends on the attitude of a person.

V. Recommendation and Conclusion


I recommend that alternative course of action one should be followed because it is what is
just for the case. There will be proper penalization to the people responsible for fraud. In addition, at
oral argument defendants' counsel asserted that upon reversal we should direct the superior court to
enter a defense judgment due to Medtrans's failure to prove causation. However, we decline to do so
in light of the conflicting evidence in the record and the possibility other important facts may be
developed at a retrial.
UNIVERSITY OF MINDANAO
College of Accounting Education

In Partial Fulfillment of the Academic Requirement

of the Subject AUDTG 411

Assurance Principles, Professional Ethics and Good Governance

First Semester SY 2016-2017

Case Study Analysis on

Howard Street Jewelries, Inc.

Submitted to:

Prof. Chirsty Marie Cajote

Submitted by:

Escobia, Marjocris

March 10, 2017


UNIVERSITY OF MINDANAO
College of Accounting Education

Submitted to:

Prof. Chirsty Marie Cajote

Submitted by:

Escobia, Marjocris

March 10, 2017