2. While auditing the financial statements of Forble Corp. (which are to be incl

Question

2.  While auditing the financial statements of Forble Corp. (which are to be included in a Securities Act registration statement), Ernie, a certified public accountant, fails to review any of Forble's journal entries, does not read the details of meetings of the board of directors, and does not even speak with the comptroller of Forble. Consequently, Ernie does not discover that substantial loans, which went unmentioned in the financial statements, had been made to Forble officers. As a result, the registration statement omits any mention of the loans. Assuming the omitted fact is a material one and that Ernie is not an officer or director of Forble, does Ernie face potential liability under Section 11 of the Securities Act of 1933? Discuss the reasons for your answer. 

Explanation / Answer

1) Answer :

               Yes Ernie should face potential liability under section 11 of the securities act of 1913.

   Reasons :

                    Sec.11 of the securities act of 1913 imposes Civil liabilities for the mistatements and ommissions in a securities offering registration statement .Normally the defendants include issuer,directors and accountants and underwriters.However the non issuer defendants (directors,accountant,underwriter) can avoid the liabilitiy if they prove that they have applied due diligence and they had reason to believe there were no mistatements or ommissions in registration statement or they did not believe there exist mistatements or ommissions in registrations document.

                        But however in our case Earnie one of the defendant who is CPA didnt apply any due diligence in verification of books of Issuer and he even doesnt try to know what is happening in the organisation,he is just simply certifies the statment which are provided by the issuer which later on leads to Ommission in registration statment so that Earnie should be liable in this case under sec.11 of the securities Act 1933.

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.