Essay --

Ernst & Young was the auditing firm of HealthSouth from 1984 to 2002. Due to financial hardship Healthshore grew desperate and developed a scheme to deceive not only shareholders but Ernst and Young. Inevitably whistleblowers came forth and a lawsuit ensued. The shareholder’s lawsuit against Ernst and Young never went to trial. However, the lawsuit against Healthshore ended in settlement. Though a travesty to the shareholders and employees not involved with the fraud, this fraudulent activity was necessary for it forced the SEC to hinder these types of events to occur in the future. There may still be cases similar to HealthShore going on today had it not been for the Sarbanes Oxley act enforcing stricter requirements for auditing firms. 1.) Ordinary negligence is defined as the absence of reasonable care that can be expected of a person in a set of circumstances. For an auditor, it is what another component auditor would have done given the same scenario. Gross negligence is a step further than ordinary negligence and is that is absence of even slight care that can be expected of an independent, competent auditor. Some states do not distinguish the difference between both of these term but the main difference is ordinary negligence is an accidently mistake and the gross negligence is a mistake caused by a reckless act or decision. Constructive negligence is a more extreme negligence than gross negligence. This negligence is unusual but was committed without intend to deceive or harm. Negligence of this magnitude occurs when an inadequate audit was done but an opinion was issued anyway. For instance, if HealthSouth employees kept a factious account that was above the auditor’s materiality threshold but did not test this account... ...ds being committed so they were not a prudent person in performing due diligence in their audit. 3c. The auditors did their due diligence in that they questioned internal controls and found them to be acceptable if it were not for the deliberate collusion among management they would have been able to detect the fraud and therefor i would not be able to find them negligent in there assertion of the effectiveness of internal controls. 4. A disclaimer of opinion should be issued if the scope of the audit is limited because of management hindrance uness the evaluation during preplanning established that the section of the business being hindered was immaterial in respect to the overall fair presentation of the financial statements in that case if the audit was performed in accordance ewith GAAS the auaidotr should not be considered negligent if a fraud had occurred.