[Sami's Coffee Shop] Javier, a new accountant who just opened his accounting firm, contracted with LittleBank to engage in accounting work for approval of loan applications. One of the applications was from Sami, owner of Sami's Coffee Shop. Sami provided Javier with copies of her income and loss statements. While looking through Sami's documents, Javier noticed multiple payments in large amounts for items listed only as "inventory" or "miscellaneous office supplies", which was odd since Sami told him the Coffee Shop served only coffee and tea. Javier did not ask Sami about the discrepancy because Sami seemed like an honest person. Javier completed the audit and prepared an opinion letter to LittleBank stating that Sami's Coffee Shop was in excellent financial condition and should feel confident in approving Sami's loan. The letter included a broad, general disclaimer. After sending the letter, Javier procured professional indemnity insurance to protect him from any malpractice claim. A month later, Sami was arrested for selling stolen jewelry from her shop and she defaulted on the loan.
-Javier claims that he should not be liable for negligence because Sami committed fraud. Is he correct?

Question

Quizplus · Accepted Answer

Javier's failure to inquire about the large, vague expenses listed as "inventory" or "miscellaneous office supplies" represents a failure to perform due diligence that a normal audit process would require, especially given the nature of Sami's business. This oversight could have potentially uncovered the fraudulent activities, making him liable for negligence in his professional duties.

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