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What’re the Key Events Public Rely and Auditors

Nay, an American national of Hungarian origin, once had a chance to settle in Chicago. Due to the economic instabilities in the 1930s, he lost several jobs but finally settled in a brokerage firm. After working two years for Ryan-Nicholas & Company, he became the organization’s president. This earned him respect and appreciation from his peers who lived in a Chicago suburb. He offered his clients an investment opportunity by launching a firm meant to offer higher interest on savings made than could happen in other financial societies. Nobody knew the details of the organization he named Escrow Syndicate, which invested clients’ money in profitable firms. In 1968, Nay committed suicide, revealing his remorse in a note for having led his clients to put their earning in a nonexistent syndicate for thirty years.

One of Nay’s customers unveiled a role of an audit firm in facilitating such a fraud when they sued Ernst &Ernst. This firm, which audited Escrow syndicate books, failed to discover a mail regulation that disallowed other workers from opening Nay’s letters. As a result, fellow workers were unable to discover the fraud thus safely concealed it. The petitioner supposed that the accused had contravened “the Security Exchange Act” by failing to conduct adequate auditing that would have revealed the fraud. The court dismissed the charge arguing that there was no adequate evidence. This investor in the Escrow syndicate appealed against the judgment. The case began fresh after the nullification of the prior ruling due to the existence of doubt over the negligence claim. Ernst &Ernst subsequently appealed against the ruling in the Supreme Court claiming that even though there was adequate evidence to sustain the negligence claim, it did not amount to the flouting of rule 10b-5. The overall goal of the 10b-5 rule was to protect investors and eventually the “stock exchange committee” called for the reformulation of the law. Supreme Court’s verdict mainly dwelt on the need to reconstitute rule 10b-5. Moreover, it ruled that Ernst & Ernst’s actions did not amount to negligence. Some of the judges did not agree, stating that the judgment was technically correct but ideologically incorrect. Following this ruling, an effort to amend the law failed as congress voted against the amended version.

Ethical conduct

Auditors have the duty to analyse records and give a view that discloses whether the accounts are prepared to give a genuine representation of the condition of the business at a given time. An auditor is supposed to adhere to a certain value during the execution of his duties. These values enhance professionalism among auditors and constitute the ethical code for auditors. This profession requires one to be objective, cautious, and above all show competence. In addition, an auditor should display integrity in judgments. Due to the nature of audit work, the exercise of due care is imperative. Auditing demands that the auditor integrates all these values while carrying out the required tests.


Investors and financial institutions rely upon audit reports in the course of making investment decisions. It is therefore paramount that the auditor is “independent” as he/she makes the report on the state of the account prepared. Independence is a state of mind and character and forms the basis for reliance on reports generated by the auditor. The principle of independence bars auditors from auditing entities where they are stakeholders, workers or directors. Affiliations are responsible for compromise of this principle as the auditor fails to conduct the audit objectively. Independence ensures that the auditors rely solely on their findings about accounts when writing their report.

Legal liabilities to foreseeable users

Auditors are specialist in the accounting discipline hence expected to carry out their duty with due care. The members of public rely on their finding to make decision that relate to the audited entity. If any third party incurs a loss after relying on findings signed by an auditor then the very auditor is liable. For any third party to claim remedy for loses, there must be evidence of omission and loss suffered due to reliance on auditor’s findings. This principle seeks to protect the users of audit reports and further enhances professionalism in auditing.

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Essay4Business. (2022) 'What’re the Key Events Public Rely and Auditors'. 13 April.

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