Reference no: EM133071537

Question - Hellener & Pagliari LLP (H&P) performed a review on Smallco Ltd. ("Smallco) for ten years. Smallco is a small local business owned and managed by Dennis Small. Because the entity is so small, a complete segregation of incompatible duties within the organization has not been possible. H&P is aware of this, but also understands that the cost of enforcing full segregation of duties is not economic for Smallco. For each of the ten years, H&P issued a clean Review Engagement Report.

Several weeks ago, H&P was informed that the owner of Smallco was suing the firm. A trusted bookkeeper who was with the company for many years had been committing fraud by writing cheques to herself. This information was uncovered when the Dennis, concerned about deteriorating profit margins, sought advice from H&P, who recommended that he review the bank statements. At that point, he found the unauthorized cheques for that month. Dennis has now gone back seven years and determined that the fraud started on a small scale in the early years but has escalated significantly in the past four years.

Should H&P have found the fraud? Will Dennis's lawsuit be successful?