The Auditors' Footnote

The Defendants were certified public accountants who audited a vending-machine company. The company had lent large sums to an affiliated firm controlled by the company's own president, who funneled the money to himself. By the time of the audit, that receivable was propped up by collateral consisting largely of the company's own stock and subject to prior liens — collateral of dubious worth. The Defendants certified the financial statements without disclosing these facts clearly. They argued they had followed generally accepted accounting principles and that no professional standard specifically required the disclosure. The Prosecution said the statements were materially misleading and the auditors knew it.