Case 6-5 Vertical Pharmaceuticals Inc. et al. v. Deloitte &
Touche LLP
On December 13, 2012, Vertical Pharmaceuticals Inc. and an affiliated company sued Deloitte &
Touche LLP in New Jersey state court for alleged accountant malpractice, claiming the firm’s
false accusations of fraudulent conduct scrapped a public company’s plans to acquire Vertical for
more than $50 million.
Vertical is a privately owned company that sells niche prescription drugs geared toward
women’s health and pain management. Trigen Laboratories (TLI) sells and markets generic
drugs. Deloitte was auditing the 2011 financial statements of Vertical and TLI, which are owned
“As a forensic audit later discovered—no money was being pilfered from the company. No
partner was stealing money from another. No improper conduct was taking place,” the complaint
said.
The revelation that Deloitte resigned from the 2011 audit and the allegations of potential criminal
conduct and financial improprieties that the auditor passed on to the audit committee left the
acquisition for dead, the complaint said. The public company found another pharmaceutical
company to acquire.
Ethical Obligations and Decision Making in Accounting, 4/e 2
Questions
1. Do you believe Deloitte & Touche breached its fiduciary duty to Vertical
Pharmaceuticals in this case? Explain.
Deloitte had a fiduciary duty to Vertical Pharmaceutical of due care in providing
professional services. Deloitte does not seem to have breached that duty. Out of due care,
Deloitte had a duty to follow up on the information supplied by two whistleblowers.
2. Do you believe Deloitte was guilty of malpractice as alleged by Vertical? Use the
discussion in this chapter to answer the question.
Vertical may be thinking that Deloitte was guilty of malpractice since Deloitte resigned
from the engagement and did not complete the audit. Vertical was suing under common
law in the state of New Jersey. Common law liability requires the auditor to perform
professional services with due care. It is possible that Vertical was considering the
3. Do you think it was ethical for Deloitte to resign from the engagement without
waiting for the results of the investigation and forensic audit that was conducted at
Deloitte’s insistence? Use ethical reasoning to support your belief.
On one hand we can say it was ethical for Deloitte to resign from the engagement.
Deloitte must have thought that it could not trust the client’s management. The distrust of
a client’s management is a red flag that fraud may exist and can be a reason to resign
from the engagement. Although Deloitte did not complete the engagement, it is possible
that Deloitte had done audit planning, procedures, testing, and other work for which
Vertical was invoiced $120,000. Deloitte did not have to wait for the results from the