Final answer:
The duty to disclose fraud to external parties, outside of a company's management and audit committee, arises when the fraud is significant, violates laws or regulations, or there is a professional or legal requirement to do so. This is especially important in the banking industry, as seen in the aftermath of the 2008-2009 recession when bank regulators were criticized for not acting earlier.
Step-by-step explanation:
A duty to disclose fraud to parties other than the client's senior management and its audit committee is most likely to exist when the fraud is significant enough to influence the decisions of users of the financial statements, is in violation of laws and regulations, or there is a requirement to report to external parties based on specific professional, legal, or regulatory obligations. In such cases, public accountants may need to move beyond the management and audit committee and report the fraud to external entities such as regulators or law enforcement agencies.
In the United States, the occurrence of fraudulent activities within a bank must be disclosed to the appropriate supervisory bodies and, depending on severity and public interest, possibly to the public. As shown in the 2008-2009 recession, when many U.S. banks suffered significant losses, there was criticism on the effectiveness of bank regulators in identifying and acting on such issues. This demonstrates the importance of timely disclosure and the proactive need for regulators to address problems as soon as they are identified to prevent larger issues.Duty to disclose fraud to parties other than the client's senior management and its audit committee is most likely to exist when there is a legal obligation or ethical duty to report the fraud. This obligation may arise in situations where the fraud poses a significant risk to the public or other stakeholders, such as shareholders, creditors, or employees. For example, if a company is involved in a Ponzi scheme that defrauds investors, there would be a duty to disclose the fraud to the affected investors.