Opinion ID: 1299870
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Heading Rank: 2

Heading: Whether Generally Accepted Auditing Standards and Generally Accepted Accounting Principles Completely Define the Scope of Responsibility of a Public Accounting Firm.

Text: Peat Marwick argues that a public accounting firm may only be found to have acted negligently in an auditing engagement if it is shown that specific standards established by the American Institute of Certified Public Accountants have been violated. These standards are generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP). The auditing standards set forth how an auditor is to go about obtaining the required information and the accounting principles set forth the format in which to present the information. We are unable to accept the argument that the formalized standards of the American Institute of Certified Public Accountants are the only measure of professional negligence with respect to auditing activities. In reaching this conclusion, we are aware that the professional licensing and regulating division of the department of commerce has adopted regulations requiring that in expressing opinions concerning financial statements all certified public accountants in this state shall adhere to the principles expressed in GAAS and GAAP. 193A Iowa Admin. Code. r. 11.4(2), 11.4(3). Rule 11.4(1) of these administrative directives defines competency of a certified public accountant as follows: A CPA ... shall not undertake any engagement for the performance of professional services which the accountant or accountant's firm cannot reasonably expect to complete with due professional competence, including compliance, where applicable, with [GAAS and GAAP]. That definition does not suggest that compliance with GAAS and GAAP are the only professional standards to which certified public accountants are held in providing services to their clients. We believe that the situation may be likened to that which exists concerning the rules of professional responsibility for lawyers. Violation of a duty owed to a client under those rules may be the basis for a finding of professional malpractice toward the client. See Cornell v. Wunschel, 408 N.W.2d 369, 377 (Iowa 1987); Whiteaker v. State, 382 N.W.2d 112, 116 (Iowa 1986). But, this is not the only basis for establishing that a breach of professional duty has occurred. Rules of professional practice must to a considerable extent be cast in general terms and cannot conceive of all situations in which a professional's actions might be deemed unreasonable. We recognized in Schmitt v. Clayton County, 284 N.W.2d 186 (Iowa 1979), with respect to engineering standards for public bodies: [T]he duty of the [public agency] is of a general nature, involving an exercise of due care under the circumstances .... While engineering knowledge and skills may well be utilized by the [public agency] in fulfilling its obligation, the ... obligation is stated in broader terms. Compliance with recognized or, in the case of the manual, statutorily mandated engineering procedures would be most relevant to whether [the public agency] has properly discharged its function. [Its] duty is not necessarily coterminous with [an] engineer's professional judgment. Schmitt, 284 N.W.2d at 189. In the later case of Gipson v. State, 419 N.W.2d 369 (Iowa 1988), we discussed the Schmitt case with approval and stated the legal obligation of the public body [as to highway design standards] continues to be a duty of `ordinary care under the circumstances.' Gipson, 419 N.W.2d at 372. In the present case, the district court instructed the jury as follows in Instruction No. 14: You have received evidence of provisions of certain accounting procedures and standards of that profession called Generally Accepted Accounting Procedures (GAAP) and Generally Accepted Auditing Standards (GAAS). Conformity with an applicable procedure or standard is evidence that Peat Marwick was not negligent and non-conformity is evidence that Peat Marwick was negligent. Such evidence is relevant and you should consider it, but it is not conclusive proof. The trial court further instructed the jury as follows in Instruction No. 17: In performing an audit, an accountant is under a duty to use the skill, judgment and learning ordinarily possessed and exercised by other accountants under similar circumstances. We believe that these instructions in combination properly set forth the correct legal standards for adjudicating the negligence claims presented. In applying these standards to Kemin's claim of negligence with respect to the nonexistence of letters of credit, we are satisfied that if the evidence is viewed most favorably toward Kemin the issue was for the jury. There was evidence that Peat Marwick was concerned with the size of the Pabsa receivable. It represented forty-three percent of Kemin's net worth. If the jury believed that Kemin's financial analyst, Tammi Guldenpfenning, advised Peat Marwick's senior auditor that the account was secured by a letter of credit, it could also have concluded based on the testimony of Kemin's expert witness that the exercise of appropriate professional judgment required the auditors to verify the existence of the letter of credit. An effort by the auditors to obtain a copy of the letter of credit for their working papers would in all likelihood have uncovered Cagwin's deception in December 1992, more than four months earlier than its eventual discovery in May 1993. For reasons we discuss later in this opinion, the jury could have reasonably believed that if Kemin had learned in December that this very large account was completely unsecured, it would have cut off future credit sales to Pabsa and proceeded to successfully collect some or all of the unpaid balance on the account, thereby sustaining a lesser loss on the account than it otherwise did.