Media Marketing Ltd’s financial statements for the year ended 30 June 2017 were
audited by George Hart and Partners. The unqualified auditor’s report was published
alongside the directors’ statements on 20 August 2017. Paul Poon, a tycoon in the
publishing industry, put forward a bid to take over Media Marketing at $2.50 per
share, based on the net asset value of the audited accounts (which also showed a
net profit for the year of $18 million). The takeover was finalised on 30 September
2017. In October it was leaked to the press that the financial statements of Media
Marketing had excluded a significant legal liability on a case, for a claim of $5 million.
The case was being appealed by Media Marketing in June 2018. The outcome of the
damages claims caused the company’s share price to plummet. Paul Poon was
extremely annoyed, partly because he had examined the accounts but overlooked
the lawsuit. He decided to sue George Hart for negligence and compensation for not
including an estimate for the likely damages.
Required:
Analyse George Hart’s legal liability and the likelihood that Paul Poon may succeed
in the action. (auditing and ethics question)

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