Johnson Enterprises, Inc., contracted with the accounting firm of P, A & E to perform an audit of Johnson. The accounting firm performed its duty in a nonnegligent, competent manner but failed to discover a novel embezzlement scheme perpetrated by Johnson's treasurer.
Shortly thereafter, Johnson's treasurer disappeared with $75,000 of the company's money. Johnson now refuses to pay P, A & E its $20,000 audit fee and is seeking to recover $75,000 from P, A & E.
a. What are the rights and liabilities of P, A & E and Johnson? Explain.
b. Would your answer to (a) differ if the scheme was a common embezzlement scheme that generally accepted accounting standards should have disclosed? Explain.