ACCOUNTING
Auditing P 5-26 Gordon & Groton, CPA's were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange. Gordon & Groton audited and reported on the financial statements of Bank, which were filed with the Securities and Exchange Commission.
Several of Bank's customers were swindled by a fraudulent scheme perpetrated by Bank's president, who owned 90% of the voting stock of the company. The facts establish that Gordon & Groton were negligent but not reckless or grossly negligent in conduct of the audit, and neither participated in the fraudulent scheme or knew of its existence.
The customers are suing Gordon & Groton under the antifraud provisions of Section10b and Rule 10b-5 of the securities Exchange Act of 1934 for aiding and abetting the fraudulent scheme of the president. The customer's suit for fraud is predicated exclusively on the nonfeasance of the auditors in failing to conduct a proper audit, thereby failing to discover the fraudulent scheme.
Required:
Answer the following questions, setting forth reasons for any conclusions stated:
a. What is the probable outcome of the lawsuit?
b. What other theory of liability might the customers have asserted?
Click here for the SOLUTION
