Introduction

“Freedom Foods Group” is an Australia based public limited company that deals in manufacturing, sourcing, marketing as well as distributing a wide range of “food and beverage” products. It is based in “Taren Point”, NSW, Australia. However, its operations are spread over North America, New Zealand, South-East Asia and China apart from the whole country of Australia. It is to be noted that it is an ASX listed company which is traded as “FNP” that employs more than 755 people. The company categorises all its products under three basic categories namely “Dairy and Nutritionals”, “Plant based beverages” and “Specialty seafood.” The major famous brands under the “Dairy and Nutritionals” includes “MILKLAB, Australia’s own, Vitalife (C-store.com.au, 2021, p1). So Natural and many more. The popular brands under the “Plant based beverages” includes “MILKLAB and Australia’s Own Organic.” While the popular brands under the “Specialty seafood” includes “Paramount and Brunswick.” It is thus one of the most popular food and beverages manufacturing, marketing and distribution company in whole Australia and parts of South Asia. The aim of this assignment is to establish the importance of auditor’s professional liability and to portray what negative publicity is created for an auditor or the audit firm in general owing to the negligence or lack of dure care or lack of proper application of professional competence during the audit. Therefore, the objectives of this report are to identify the legal and economic basis of auditing as well as proper application of applicable reporting requirements and auditing standards, followed by analysing and communication of legal and professional judgement of the auditor and his responsibilities to clients and other parties. The report also aims to assess optimum audit strategies and audit approach so that the professional integrity could be maintained and risk of litigation for the auditor could be lessened thereby enhancing the reputation of the auditor and not downgrading it. The aim of this assignment is to be accomplished through deciphering a practical case of accounting scandal concerning “Freedom Foods Group” that was discovered in 2019-2020 where the audit firm, “Deloitte” was sued for professional negligence.

Operational Areas Of Freedom Foods And Synopsis Of The Assignment

“Freedom Foods Group” deals in manufacturing, sourcing, marketing as well as distributing a wide range of “food and beverage” products such as “Dairy and Nutritionals”, “Plant based beverages” and “Specialty seafood (C-store.com.au, 2021, p1).” The aim of this assignment is to establish the importance of auditor’s professional liability and to portray what negative publicity is created for an auditor or the audit firm in general owing to the negligence or lack of dure care or lack of proper application of professional competence during the audit. The report also aims to assess optimum audit strategies and audit approach so that the professional integrity could be maintained and risk of litigation for the auditor could be lessened thereby enhancing the reputation of the auditor and not downgrading it.

Factual Events And Key Issues Behind The Case Of Legal Liability 

The legal liability case which will be discussed here in this report is concerning the accounting scandal of “Freedom Foods Group” which was discovered in 2019-2020. In this case, both the “Freedom Foods” as well as its auditor, “Deloitte” has been accused. A “class action” has been lodged against Freedom Foods for accounting malpractice and fraud and its auditor, ‘Deloitte” has been accused of negligence of not able to decipher such accounting fraud irrespective of auditing the firm over the last five financial years. The case for which a class action was lodged by the shareholders of Freedom Foods in the “Victorian Supreme Court” is regarding a total of $590 million asset valuation write down as well as restatements in the previous year’s results (Annual Report 2020, 2022, p2(3)). It was material accounting fraud committed by Freedom Foods over the last few years which was discovered in financial year 2019-2020 (Afr.com, 2021, p1(3)). According to the class action, Freedom Foods allegedly contravened its obligations of continuous disclosure as required by the ASX listing rules where it failed to inform the market regarding the “price-sensitive” information concerning FY 2020 as well as historical performances thereby misleading the market altogether. The auditor, “Deloitte” was accused of not able to detect such material accounting fraud for so many years in spite of the fact that it was the same audit firm that audited Freedom Foods over the last five financial years. It is to be noted that Deloitte is also accused of devising out a unique audit strategy which was very useful in treating a considerable amount of expenditures incurred during years as capital assets and hence as a result the profits were inflated by a considerable margin every year in spite of the fact that Freedom Foods were making substantial amount of loss year after year. This made the company to restate several years of accounts again in 2020. The company at last accepted that the accounting figures and data published year after year was very inaccurate and restated several years accounts again in 2020 under the pressure and ongoing investigation being conducted by ASIC. Among the several ground breaking revelations being conduct6ed by Freedom Foods under the ongoing investigations were a reported profit of “$11.6 million” in 2019 when the company actually incurred a net loss of “$145.8 million (Afr.com, 2021, p1(3)).” The company also revealed the fact that the amount of losses were not restricted to the above-mentioned figure of $145.8 million, but was way above the figure for the subsequent year ended, June, 2020 where the loss reached as big as $174.5 million (Afr.com, 2021, p1(3)). So, the audit firm was charged of negligence. It is to be noted that the auditors can be sued of negligence and no proper application of due care being employed by the auditor during audit which cased material loss for the parties relying on such audit report especially the shareholders. It is to finally noted that the total amount of restatements and asset write-downs for Freedom Foods was $590 million out of which the major contributor was asset write downs and faulty capitalisation practices being followed by the company that accounted for $372 million (Afr.com, 2021, p1(3)). This proves that the expenses which Freedom Foods was incurring was completely capitalised in place of putting it on the “Profit and Loss statement” as expenses. Deloitte as an external auditor who was auditing Freedom Foods over the past five financial years failed to detect such smart accounting or earnings management or window dressing conducted by the company executives. So, in this case, the shareholders of Freedom Foods suffered monetary loss due to negligence or non-application of dure care by the auditor, Deloitte, though the charges are yet to be proved. It is to be further noted that there was fraud being committed by the company executives regarding “Stock options” as well worth $5.5 million. Certain share options or extensions that were given were not authorised by the Board and as a result, there was a restatement of $5.5 million concerning share options which were completely unauthorised. Hence, the auditor was sued by the shareholders of Freedom Foods and a “Class action” had been launched against both the Freedom Foods and its auditor, Deloitte.