In a letter to the audit committee of the Cline Wholesale Company, Jerry Schwartz, CPA, informed them of material weaknesses in the control of inventory. In a separate letter to senior management, he elaborated on how the material weaknesses could result in a significant misstatement of inventory by the failure to recognize the existence of obsolete items. In addition, Schwartz made specific recommendations in the management letter on how to improve internal control and save clerical time by installing a computer system for the company’s perpetual records. Management accepted the recommendations and installed the system under Schwartz’s direction. For several months, the system worked beautifully, but unforeseen problems developed when a master file was erased. The cost of reproducing and processing the inventory records to correct the error was significant, and management decided to scrap the entire project. The company sued Schwartz for failure to use adequate professional judgment in making the recommendations.
a. What is Schwartz’s legal and professional responsibility in the issuance of management letters?
b. Discuss the major considerations that will determine whether he is liable in this situation.