A false there was no privity of contract between

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high levels of negligence are required before there is liability. a. False. There was no privity of contract between Thompson and Doyle and Jensen; therefore, ordinary negligence will usually not be sufficient for a recovery. b. True. If gross negligence is proven, the CPA firm can and probably will be held liable for losses to third parties. c. True. See a. d. False. Gross negligence (constructive fraud) is treated as actual fraud in determining who may recover from the CPA. e. False. Thompson is an unknown third party and will probably be able to recover damages only in the case of gross negligence or fraud. Assuming a liberal interpretation of the legal relationship between auditors and third parties, the answers to a. and e. would probably both be true. The other answers would remain the same. 5-23 a. Hanover will likely not be found liable to the purchasers of the common stock if the suit is brought under Rule 10b-5 of the Securities Exchange Act of 1934 because there was no knowledge or intent to deceive by the auditor. However, if the purchasers are original purchasers and are able to bring suit under the Securities Act of 1933, the plaintiffs will likely succeed because they must only prove the existence of a material error or omission. b. Hanover was aware that the financial statements were to be used to obtain financing from First National Bank. Hanover is likely to be held responsible for negligence to the bank as a known third party that relied on the financial statements. c. The plaintiffs might state a common law action for negligence. However, they will most likely not prevail due to the privity requirement. There was no contractual relationship between the defrauded parties and the CPA firm. Although the exact status of the privity rule is unclear, it is doubtful that the simple negligence in this case would extend Hanover’s liability to the trade creditors who transacted business with Barton Corp. However, the facts of the case as presented in court would determine this. 5-24 4
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1. c Both. Material misstatements must be shown under both acts. 2. c Both. Monetary loss must be demonstrated under both acts. 3. d Neither. Plaintiff does not have to prove lack of diligence under the 1933 act, but the accountant can use due diligence as a defense. Scienter must be demonstrated under the 1934 act. 4. d Neither. Privity applies to common law and not the 1933 and 1934 acts. 5. b 1934 act only. Reliance is not required under the 1933 act. 6. b Scienter is required under the 1934 act, but not the 1933 act. 5
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  • Fall '19
  • U.S. Securities and Exchange Commission, Securities Exchange Act of 1934

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