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NATIONAL MEDICAL TRANSPORTATION NETWORK

National Medical Transportation Network (MedTrans) eventually became the largest

ambulance services provider in the United States. Reaching that pinnacle was not an easy journey. In
early 1992, MedTrans encountered cash flow problems that prompted the company’s two owners to
search for external financing. The co-owner located a company willing to invest $10 million in
MedTrans. During the negotiation with that company, MedTrans auditor, Deloitte & Touche,
uncovered problems in its client’s accounting record. Those problems prevented Deloitte from issuing
an unqualified opinion on MedTrans’ 1992 financial statement. After several unpleasant confrontations
with MedTrans Chief executiveofficer, Deloitte resign as the company’s audit firm.

Following Deloitte’s resignation, the $10millon investment deal collapsed. Within the few
month, MedTrans two owner sold their firm to a largest corporation. Unhappy with Deloitte’s lack of
“cooperation”, medtrans’ former owners sued Deloitte to recover the sizeable loss they incurred on the
sale of their company. Among other charges, the former owners alleged that Deloitte acted
negligently by “withdrawing prematurely” from the 1992 MedTrans audit engagement.

No doubt, Deloitte’s legal counsel confidently tackled the MedTrans lawsuit. The allegation that
Deloitte negligently withdrew from 1992 medtrans audit engagement seemed implausible since the
client had adamantly refused to make several large and necessary adjustments to its 1992
financial statement. Threatening comments made to Deloitte auditors by one of MedTrans’ co-owners
provided even stronger justification for the audit firm’s resifnation. Imagine then the shock and disbelief
of Deloitte’s attorneys when the jury that heard the lawsuit agreed with MedTans’ former owners and
imposed a multimillion-dollar judgment on the prominent accounting firm.

MedTrans Seeks Help

MedTrans’ two principal officers, Roberts andMorgan, served as the company’s chief executives
officer (CEO) and president, respectively, and each owned 50 percent of MedTrans common
stock. Deloitte audited the company annual financial statements each year from 1988 through
1991 –Medtrans fiscal years ended March 31. Apparently, Deloitte encountered few problems
during those audits and issued an unqualified opinion each year on Medtrans’ financial statements.
 By the late spring of 1992. MedTrans needed cash and quickly. The company owed $2 million of
payroll taxes and faced a 412 million repayment to its primary lender, which had suddenly and
unceremoniously yanked MedTrans’ line of credit. Making matter worst, MedTrans’ chief financial
officer (CEO) unexpectedly resign in early June 1992. That resignation triggered crisis between
MedTrans and the company audit firm. Deloitte was nearing completion of its 1992 MedTrans audit and
had asked the CEO to sign a letter of a representation indicating that the company’s financial statement
was materially accurate. The CFO told Gordon Johns, the Deloitte audit engagement partner, that
he could not sign the letter of representation since he did not believe MedTrans’ financial statement
were reliable. A few days letter, the CFO met with Johns to discuss the situation.

At the meeting, Ensz (the CFO) alerted Johns to four or five matters relevan to the audit. Ensz
said that upon informing Roberts (the CEO) that those matters were not properly entered in
MedTrans’s journal, Roberts told Ensz to leave the journals as they were and “let’s see” if the auditor
“find it.” Questioning Roberts’s character for honesty because of some things Roberts advocated in
presenting financial information, Ensz also stated he lacked faith in integrity of Roberts and
MedTrans’s financial statements.

The CFO’s unsettling allegations caused Deloitte to approach the remainder of the 1992
MedTrans audit with extreme caution. By the end of June 1992, the Deloitte auditors concluded that
their client’s financial statements contained material errors. Those financial statementsreported a net
income of nearly $2 million of fiscal 1992, while Deloitte’s audit suggested that MedTrans had suffered a
loss of approximately $500,000. A large increase in MedTrans’ allowance for a bad debts proposed by
Deloitte accounted for most of the difference between those two figures.

During June and July 1992, Roberts negotiated with William Blair & Company to obtain
the additional capital needed by MedTrans. In exchanges for $10 million investment in MedTrans,
Roberts and Morgan offer Bair 50 percent ownership interest in the company. While mulling
over this offer, Blair’s executives reviewed MedTrans’ audited financial statements for 1992. Based
largely upon the $2 million profits reported in those financial statements, Blair forecasted that
MedTrans’ annual earnings would top $6 million by 1995. On July 27, Blair’s executives tentatively
agreed to invest in MedTrans. The agreement was contingent on MedTrans’ receiving an unqualified
audit opinion on its 1992 financial statements.Roberts’ negotiations with Blair were periodically
disrupted by an ongoing quarrel with Gordon Johns. Roberts and Johns feuded throughout the
summer of 1992 over the large increase in the company’s allowance for bad debts that Deloitte believed
was necessary. During a July 9 meeting, Roberts warned Johns that MedTrans’ audited financial
statements would have a significant impact on whether the Blair transaction was consummated.

A very focused Roberts vocally and explicitly emphasized theimportance of MedTrans’s pre-
tax earningsbecause of the potential that Blair might invest in the company....Johns [then] presented
Roberts with about $2.5 million in suggested adjustments involving the accounts receivable reserve
account. Roberts old Johns ‘’you better not propose any adjustment that will__my deal or you’ll be
sorry’’.
 Shortly after the July 9 meeting Johns contacted an executive. Deloitte partner in thefirm’s New
York headquarters.The executive partner told Johns that ‘’we should not be associated with companies
that threaten us.’’ Unless Roberts accepted the proposed adjustments, the executive partner
recommended that Johns resign from the engagement.Johns told the executive partner that before
raising the issue again with Roberts, he wanted to give him some time to analyze Med-Trans’ bad debt
reserve and to reconsider the need for the proposed adjustment. On July 30, Roberts and Johns met
again. During this meeting, Roberts reminded Johns of the impact Deloitte’s audit would have on the
proposed Blair deal. Roberts also gave Johns a memorandum prepared by Med Trans’ personnel that
presented a more favorable analysis of the company’s bad debt reserve than the analysis developed by
Deloitte.

Roberts and Johns met a final time on august 13, 1992, to discuss Deloitte’s audit and the
pending Blair transaction. At this meeting, Johns presented a memorandum containing a new set of
proposed adjustments to MedTrans’ 1992 financial statements. Collectively, these adjustments would
have reduced Med Trans’ pre-audit net income even more than the adjustments originally proposed
by Deloitte.

During Johns’s presentation, Roberts rose, threw down the memorandum and said very angrily:
‘’you are finished.’’ Although Johns thought he had been fired, Roberts told Johns not to construe the
situation that way. However,after MedTrans’s successive rejections of proposed adjustments to its
unaudited financial statements, Johns believed the parties’ mutually exclusive views of those
statements indicated there was no longer a basis for relationship. Thus, Johns told Roberts that
if defendants [Deloitte] had not been fired, he was resigning. Roberts told Johnsthat ‘’you’re going to
finish this regardless, under court order or otherwise.’’ Johns believed such threat destroyed any ability
to continue as an independent auditor. Johns also believed resignation was necessary because
MedTrans bullied Deloitte’s personnel and defendants were put at risk by MedTrans’s lack of
commitment to financial statements accurately depicting the difficulties the company
experienced in fiscal 1992.

Deloitte formally resigned from the MedTrans engagement shortly after the August 13
meeting between Johns and Roberts. Four days later, Roberts sent a letter to Deloitte reminding the
firm that its resignation would have serious repercussions for the pending Blair deal. Roberts
also insisted once more that Deloitte complete the 1992 audit. Deloitte refused to be swayed
and remained MedTrans’ ‘’former’’ auditor.

DESPERATELY SEEKING A REPLACEMENT AUDITOR

William Blair & company learned of Deloitte’s resignation in mid-August 1992. On August 25, a Blair
representative told Roberts that his firm was indefinitely postponing the planned investment in
MedTrans and would not reconsider that decision until MedTrans obtained an independent audit
opinion on its 1992financial statements.The Blair official suggested that MedTrans retain Blair &
Company’s audit firm, Ernst & Young. Roberts immediately contacted Ernst & Young. Within a few
days, Roberts sent Deloitte a letter authorizing the firm to ‘’discuss freely with E & Y the audit of
MedTrans for fiscal 1992 and the facts and circumstances of Deloitte’s withdrawal/ resignation/
disengagement as MedTrans’s auditor.’’

Gordon Johns met with representative of Ernst & young on September 3, 1992 During that
meeting, Johns explained why Deloitte had resigned from the MedTrans engagement. Johns also
revealed that he questioned the integrity of MedTrans’ senior executives. Despite the information
obtained from Johns, E & Y agreed to audit MedTrans’ 1992 financial statements.

Roberts concluded during late September that Blair was unlikely to invest in MedTrans
regardless ofthe outcome of E & Y’s audit. At that point, Roberts began searching for another potential
investor to bail MedTrans out of the financial crisis it faced. Within a few days, a company contacted by
Roberts, American Medical response, Inc. (AMR), expressed interest in acquiring MedTrans. Like
MedTrans, AMR’s principal line of business was providing ambulance services. When AMR executives
recommended that MedTrans retain Peat Marwick, AMR’s audit firm, to audit its 1992 financial
statements, Roberts dismissed E & Y and contacted Peat Marwick. Roberts also contacted
Deloitte and authorized the firm to discuss with Peat Marwick the circumstances surrounding its
resignation from the MedTrans audit. After communicating with Deloitte, the San Diego office of
PeatMarwick agreed to audit MedTrans’ 1992 financial statements. One week after accepting the
engagement, Peat Marwick resigned. Subsequent testimony revealed that a ‘’directive’’ sent by
Peat Marwick’s headquarters office to the firm’s San Diego office prompted that resignation. Peat
Marwick’s refusal to audit MedTrans apparently quelled AMR’s interest in the company.MedTrans
finally retained another audit firm in late October 1992.

This firm, identified only as ‘’Silberman’’ in court transcripts, served asMedTrans’ auditor during
the mid-1980s. before accepting the engagement, Silberman discussed with Deloitte the
circumstances surrounding its resignation as MedTrans’ auditor. In December 1992, Silberman issued
an unqualified opinion on MedTrans’ 1992 income statement reported a loss of $480,000, which was
approximately the figure Deloitte had , arrived at several months earlier.Laidlaw Medical
Transportation, Inc., purchased MedTrans in June 1993. Roberts and Morgan netted $3 million
from the sale of their company. Under Laidlaw’s ownership, MedTrans soon became the
largestprovider of ambulance services in the nation.MEDTRANS SUES DELOITTE In August 1993, Roberts
and Morgan sued Deloitte on behalf of their former company. The principal allegations against Deloitte
centered on charges of professional negligence and breach of contact. Roberts and Morgan
charged that Deloitte’s malfeasance caused Blair not to consummate the $10 million investment deal
arranged by Roberts. MedTrans’ former co-owners requested damages equal to the difference
between the amount they received from the sale of MedTrans and the amount the company
allegedly would have been worth had Blair invested in the firm. The lawsuit was tried before a
jury in a California state court in July 1995.

MedTrans’ legal counsel succinctly summed up the key allegations against Deloitte in the
following statement.What is the negligence that we contend occurred? What is the breach that
we contend occurred? Very simply they [Deloitte] contracted over a course of years, and in
connection with the year of 1992, to perform an audit and to render an opinion, they did neither, and
walked away after getting payment for such services.Deloitte’s defense team rebutted these allegations
by insisting that the accounting firm had a right to resign from the1992 audit when it ‘’lost faith in the
honesty of MedTrans’s senior management.’’

A CPA retained by Deloitte to serve as an expert witness testified that the firm was
obligated to resign from the engagement after its independence was ‘’compromised by Robert’
threats.’’After a short trial, judge Philip sharp instructed the jurors on the illegal matters they should
consider during their deliberations. The jurors reached their decision quickly, ruling in favor of
MedTrans on all key issues raised during the trial. the jury ruled that Deloitte acted negligently and
breached its contractual obligations to MedTrans when it withdrew from the 1992auditengagement.
Additionally, the jury ruled that Deloitte ‘’negligently interfered ‘’ with and ‘’disrupted’’ MedTrans’
economic relationships with Blair, Ernst & Young, and Peat Marwick.

This letter ruling stemmed from charges that Deloitte made defamatory statements to E &
Y and Peat Marwick concerning the integrityof MedTrans’ former executives. Deloitte allegedlymade
these statements during the predecessor-successor auditor communications with those two firms
following its resignation as MedTrans’ auditor. After issuing their rulings on the specific complaints
filed against Deloitte, the jurors awarded MedTrans’ former owners a $9.9 million judgment against the
accounting firm.

DELOITTE APPEALS JURY VERDICT

Deloitte quickly appealed the jury’s verdict. The accounting firm insisted that the trial judge erred when
he instructed the jury prior to its deliberations. Included in judge sharp’s instructions to the jury was the
following statement concerning an auditor’s right to resign from an engagement.Once an
accountanthas undertaken to servea client, the employment and duty as an accountant continues
until ended by consent or request of the client or the accountant withdraws from the
employment, if it does not unduly jeopardize the interest of the client, after giving the client
reasonable opportunity to employ another accountant or the matter for which the person
[accountant] was employed has been concluded.These instructions, Deloitte maintained, gave the jury
only one alternative, namely, deciding the case in MedTrans’ favor.

The accounting firm argued that the phrase ‘’if it [auditor’s resignation] does not unduly
jeopardize the interest of the client’’ implies that an auditor must consider the economic impact on a
clientbefore resigning. Deloitte demonstrated during the appeal that professional auditing
standards do not require auditors to consider the potential economic impact on a client of a
resignation decision. The jury instructions also suggested that an auditor must give a client ‘’reasonable
opportunity’’ to retain another audit firm before resigning. Again, Deloitte established that professional
standards do not impose such a responsibility on independent auditor.

Deloitte argued before the appellate court that an accounting firm may resign from an audit
engagement whenever it has ‘’good cause’’ to do so. The firm also insisted that ‘’good cause’’ in this
context must be defined in reference to the professional standards of the auditing discipline.
Deloitte then identified three reasons why it had good cause to resign from the 1992 MedTrans
audit: MedTrans management’s refusal to cooperate fully with fully with the auditors, the auditors’loss
ofconfidence in client management’s integrity, and the threats that Roberts made to Johns. Deloitte
claimed that Roberts’ threats, alone, provided sufficient justification to resign since those threats
undermined its independence. MedTrans’ attorneys agreed that auditors could resign when they had
‘’good cause’’ to do so but attempted to persuade the appellate court to apply a more general, legalistic
interpretation to that phrase that was independent of professional auditing
standards.Strengthening Deloitte’s good cause argument was a ‘’friend of the court’’ filling submitted
the American institute of Certified Public Accountants (AICPA). In that filling, the AICPA reiterated
Deloitte’s assertion that Roberts’ threats undermined the audit firm’s independence.

The AICPA noted that an must decide as a ‘’matter of professional judgment’’ whether he is
independent. ‘’an auditor’s independence may be impaired whenever themember and the member’s
client company or its management are in threatened or actual positions of material adverse interests by
reason of threatened or actual litigation.’’ The AICPA went on to observe that ‘’an auditor who believes
independences has been impaired is forbidden from issuing an audit opinion.’’After briefly contesting
Deloitte’s contention that it had ‘’good cause’’ to resign from the 1992audit, MedTrans’ legal counsel
adopted a second strategy during the appeal. MedTrans’ attorneys argued that Deloitte forfeited its
right to file an appeal predicated on the allegedly prejudicial jury instructions since the
accounting firm had not offered the trial judge any alternate jury instructions.

In fact, Deloitte initially challenged the jury instructions written by judge Sharp. At that point,
Judge Sharp offered to consider alternate instructions developed by Deloitte’s legal counsel; however,
the accounting firm never submitted revised jury instructions for the judge’s consideration. Despite
Deloitte’s apparent oversight, the appellate court ruled that Deloitte did not forfeit its right to challenge
the impact of judge Sharp’s jury instructions on the jury’s verdict.Where as here, the trial court gives
a jury instruction which is prejudicially erroneous as given, i. e., Which is an incorrect statement
of law, the party harmed by the instruction need not have objected to the instruction or
proposed a correct instruction of his own in order to preserve the right to complain of the
erroneous instruction on appeal.

JURY VERDICT OVERTURNED

In early 1998, the California Court of appeal overturned the jury’s verdict in the MedTrans v. Deloitte
civil case. The appellate court ruled that judge Sharp’s instructions predisposed the jury to rule in
MedTrans’favor.After overturning the jury’s verdict, the appellate court addressed each of the major
allegations made against Deloitte by MedTrans in the original trial. First, the appellate court rejected
MedTrans’ contention that Deloitte acted negligently when it withdrew from the 1992 audit. The
court agreed with Deloitte that the auditing profession’s standards are the primary authoritative source
in this context.Applying those standards, appellate court that Deloitte clearly had a reasonable
basis for resigning from the 1992 audit. Second, the appellate court discredited the breach of
contract allegation lodged against Deloitte. Recall that MedTrans’ management pressured Deloitte to
issue an unqualified opinion on the company’s original 1992 financial statements. The appellate court
ruled that ‘’Deloitte cannot be held liable to MedTrans in breachof contact for having declined to issue
a false ’unqualified’ audit report.’’ The court also rejected MedTrans’ claim that Deloitte’s failure to
issue an audit opinion of any kind constituted breach of contract.

Finally, the appellate court dismissed MedTrans’ assertion that Deloitte’s communications
with the company’s successor auditors were defamatory.Defamation is an intentional tort. In any
event, as discussed,the record contained ample evidence that defendants ’communications with
potential successor auditors about their reasons for resigning from their engagement with MedTrans
complied with applicable professional standards requiring open communicationwith potential
successor auditors and were consistent with MedTrans’s written authorizations requesting defendants
to speak freely with those potential successor auditors.

Instruction :

Setelah pengunduran dirinya, mantan CFO MedTrans bertemu dengan Gordon Johns, Deloitte audit
engagement partner. Apakah CFO memiliki tanggung jawab untuk menginformasikan kepada Gordon
Johns tentang kesalahan dalam laporan keuangan MedTrans 1992? Berikan penjelasan Anda!

Jawab :

Menurut IFAC 140.1: Prinsip kerahasiaan membebankan kewajiban pada akuntan profesional untuk
tidak mengungkapkan di luar perusahaan atau menggunakan informasi rahasia organisasi yang
diperoleh sebagai hasil dari hubungan profesional dan bisnis tanpa otoritas yang tepat dan spesifik atau
kecuali ada hak hukum atau profesional atau tugas untuk mengungkapkan.
Namun, IFAC 140.7 menyatakan bahwa ada tugas profesional atau hak untuk mengungkapkan, ketika
tidak dilarang oleh hukum: Untuk mematuhi standar teknis dan persyaratan etika.
Lebih lanjut, menurut IFAC 140.6, akuntan profesional tidak boleh, menggunakan, atau mengungkapkan
informasi rahasia apa pun yang diperoleh atau diterima sebagai hasil dari hubungan profesional atau
bisnis.
Dalam hal ini, CFO memiliki tanggung jawab etis untuk memberi tahu Johns semua kesalahan yang ia
temukan dalam laporan keuangan MedTrans '1992. CFO adalah pejabat perusahaan yang terutama
bertanggung jawab untuk mengelola risiko keuangan perusahaan, perencanaan keuangan, dan catatan. -
menjaga, serta pelaporan keuangan ke manajemen yang lebih tinggi. CFO, memiliki tanggung jawab
utama untuk laporan keuangan dan harus menunjukkan kepada auditor setelah mereka menemukan
kesalahan atau salah saji dalam laporan audit. Mereka harus mengetahui bahwa tanggung jawab auditor
adalah untuk mengekspresikan pendapatnya dan membuat penilaian materialitas atas laporan audit.