AUDITING DUE DILIGENCE IN LAW AND ETHICS: THE PONZI FEEDER FUND CASES

Albert D. Spalding

Review of Business and Finance Studies, 2012, vol. 3, issue 1, 1-12

Abstract: Financial accounting is an information conveyance process. When financial auditors issue an opinion in regard to financial statements, the auditors are providing assurance that those financial statements fairly represent the entity, and are prepared in accordance with the relevant standards. If there is a problem with the financial statements for which an unqualified audit opinion has been issued, the auditors may be questioned in regard to their compliance with professional technical and ethical standards that require competency, honesty, and full disclosure. These questions may be asked by the auditors’ professional organizations, such as the American Institute of Certified Public Accountants (AICPA), by government regulators who authorize the performance of auditing services, and by the judges and juries of the judicial system. This paper considers how the judiciary, in particular, takes into account auditors’ technical and ethical standards when auditors are sued for professional negligence and negligent misrepresentation. This investigation is done within the context of the recent lawsuits against auditors of feeder funds that invested with Ponzi scam artists such as Bernard Madoff. This paper concludes that the auditing profession has a teachable moment in the wake of the feeder fund failures, and should not overlook this opportunity to upgrade its ethical standards.

Keywords: Auditing; financial disclosure; due diligence; negligent misrepresentation; accountants’ liability; professional ethics; Ponzi; feeder funds. (search for similar items in EconPapers)
JEL-codes: K23 M42 M48 (search for similar items in EconPapers)
Date: 2012
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