L22 Notes_Part_9 - Suggest a new defense. Securities...

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Chapter 17: Q10 10. Consider the following situation. A group of investors who specialize in investing in high-technology IPOs files suit against the auditors of one of those firms when the stock loses 50 percent of its value shortly after issue. Analysts attribute the steep decline to the firm losing a major contract. The investors, however, are basing their claim on the revelation that much of the firm's inventory was carried at a value well above its fair market value. In fact, the auditors had been negligent in their audit of management's estimate of the market value of inventory. The audit firm failed to hire appropriate specialists to price the goods, instead relying on in- house expertise developed through their extensive experience auditing high-technology firms. If you were the senior partner of the audit firm for this high-technology firm, how would you defend against the lawsuit? Specifically, discuss the merits of the defense strategies available to your firm that are noted in the text.
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Unformatted text preview: Suggest a new defense. Securities Exchange Act of 1934 Concerned primarily with ongoing reporting by companies whose securities are listed and traded on a stock exchange. Section 18 imposes liability on any person who makes a material false or misleading statement in documents filed with the SEC. Section 10(b) and Rule 10b-5 are the greatest source of liability for auditors under this act. Securities Act of 1934 Securities Act of 1934 involves the public trading of securities 1. Section 10b-5 - interpretation has varied but most courts have construed the words to imply deception or fraud 2. differs from SEC Act of 1933 in that the plaintiff must demonstrate the following to prevail: a. owned at least one share b. a material fact was misstated in the F|S's c. sustained a loss due to reliance on the material misstated F|S's d. auditor's audited with intent and scienter 3. Auditor's defenses (same as under SEC Act of 1933) 4. Cases: Hochfelder, Solitron, McLean...
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L22 Notes_Part_9 - Suggest a new defense. Securities...

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