W5A2 Part 1 – Accountants’ Liability Garnett Food Service, Inc. owned the buildi
ID: 361142 • Letter: W
Question
W5A2
Part 1 – Accountants’ Liability
Garnett Food Service, Inc. owned the building and land that Woods, Johnson and Smith planned to purchase. Prior to putting the property on the market, Garnett hired Lindsey Silver, of the accounting firm of Stevens, Silver and Winters to conduct an audit of the current business located on the property. Silver knew that potential buyers would use the audit report in making their decision to purchase the property. Silver’s audit report showed the current restaurant to be profitable. Woods, Johnson and Smith relied on the accountant’s report in agreeing to purchase the property. It was later discovered that Silver made a number of mistakes that overstated the profitability and value of the property. Woods, Johnson and Smith sued Silver and her accounting firm for damages based on negligent misrepresentation of fact. Silver used lack of privity of contract as her defense.
Analyze the arguments for each party. Be sure to include a discussion of the various approaches to the duty of care a public accountant owes to third parties.
Part 2 – Sureties and Guarantees
Fifth Third Bank loaned $100,000 to Woods, Johnson and Smith to purchase the restaurant. Since the three parties did not have much cash or other assets, the bank required assurance of payment from another party. Chuck Wagon agreed to be a surety for the loan.
Evaluate the bank’s options if the restaurant defaults on the loan. Be sure to identify the amount Wagon is responsible for paying, if any.
Explain why the bank prefers the surety to a guaranty.
Part 3 – Secured Transactions and Bankruptcy
Harrell Restaurant Supplies agreed to sell two new commercial refrigerators to [Restaurant Name] for$17,500. Harrell retained a security interest in the equipment. [Restaurant Name] agreed to pay for the equipment in equal installments over 48 months.
Evaluate Harrell’s rights as a creditor if [Restaurant Name] files bankruptcy 18 months after purchasing the equipment.
Discuss Harrell’s rights as a creditor if [Restaurant Name] sold the two refrigerators for $750 approximately 30 days prior to filing bankruptcy.
Explain how a failure by Harrell to file a financing statement might impact the outcome of both scenarios.
Part 4 – Employment Discrimination
Born in 1970, Florita Lopez immigrated from Mexico in 2001 and became a U.S. citizen in 2005. Lopez speaks fluent English with a strong Hispanic accent. Her accent does not interfere with her ability to communicate with others. Lopez worked as a cook and waitress for 20 years. Although she did not have any formal management experience, Lopez applied for a shift manager’s job with [Restaurant Name]; however, she was not hired for the position. The restaurant currently employs 5 full time employees and 11 part time employees.
Analyze the possible grounds Lopez might have for a discrimination lawsuit against [Restaurant Name].
Provide support for each ground selected and then provide arguments that [Restaurant Name] could make to counter each claim.
Explain how your answer might change if the restaurant only employs a total of 12 people.
Explanation / Answer
Solution:-
BUSINESSLAW
The type of the business operated by the three partners is the partnership ownership. This is clearly indicated by the fact that each and every partner has contributed to all aspects of the business operations.
The decision making process of the company operations is based on the three partners which is guided by the partnership deed in the context of the operations of both the restaurant and bar in Tampa Florida.
It is there justifiable that the type of the partnership between the three partners is general partnership in the context that the profits, liabilities and management duties are divided equally between the three partners as shown by various cases which have been related with the operations of the business unit.
The name of the business is DJG ventures which is depicted by the initials of the trio’s in the business operations for the purpose of neutrality.
PART 1
ACCOUNTANT LIABLITY
It is clear in the context Garnett food service which owned the venture where DJG ventures operates and which the three partners wanted to purchase for the purpose of their operations.
It is clear that the company that is Garnett food service hired Lindsey Silver of the accounting firm of Stevens, Silver and winters in the context of performing an audit process of the status quo of the business in the process.
This was in the context of the decision making process related with DJG ventures to use the audit report to either decline the purchase offer of the venture or to actually purchase the venture for their partnership operations.
The audit report that was reported by Lindsey silvers showed that the current restaurant which was owned by DJG ventures was profitable where the three partners relying on the accounting report made the choice of acquiring the venture.
However, they later discovered that Lindsey Silver had made some critical mistakes in relations with the property valuation in that the company overstated the profitability and value of the property. This then being the fact, Woods, Johnson and Smith decided to sue Lindsey Silver and her accounting firm for the caused damages which were based on gross negligence and misrepresentation of facts.
On her defence it is clear that Silver used lack of privity of contract for her defence.
In this context then it is clear that that the accounting team owes the third part a fiduciary duty of care as follows;
It is clear that the torts extends to the ultra mares rule where accountants owes a duty of care to the persons to which primary benefits of the accounting reports and were intended.
In this case it is clear that the statement was meant for the DJC ventures since it was the three partners that had an intention of acquiring the venture.
The misrepresentations of the information through overvaluation process by the Silver and her accounting team should be viewed in the context of the ultra mare in that the information acted as the major influencing factor for the purchase of the property by the three partners.
It is also clear that the accounting process by Silver and her accounting team lacked due diligence in the sense that after the evaluation process the accounting team lacks any tangible evidence to clear indicate that the financial statement that they represented to be used by DJC ventures to make the purchase decision was not true and incomplete since the team lacks any measures to nullify their results.
This then clear indicated that the results were as per the instructions and liking of their boss that is Garnett Food services who had hired Silver to perform the valuation process.
The accountant that is Silver is also liable for the damages in the sense that the misleading statement that they made actually affected the pricing of the building which was owned by Garnett Food Services which actually hired Lindsey Silver to effectively evaluate the value of the property.
The liability should also be related to Lindsey and her accounting team in the context that the purchaser that is DJC ventures actually made the purchase of the property relying on the false misleading statement in making the purchase of the property without having any clue that the statement presented by Lindsey Silver was inaccurate.
This is in the context that Lindsey Silver well knew that the statement was inaccurate and misleading thus lacking fiduciary duty of good faith to the third party.
It is also arguable that Lindsey Silver had with all intent to mislead the purchaser that is the DJC venture in its decision making process to purchase the property that was owned by Garnett Food Services the firm that had hired them and the owner of the property.
Finally, it is also clear that the documents that accountant information that was presented to DJC lacked confidentiality and privity in that the information was made available to the owner of the property thus lacking confidentiality which indicated possibility of doctoring the documents before being presented to DJC venture for the evaluation process.FASB. (2016).Accountant's duty of care. Retrieved from http://www.shsu.edu/~klett/accountant%20issues.htm
This then clearly indicates that privity and communication was working in favour of Garnett food services as opposed to DJC partners thus nullifying any possibility of effective and credibility of the valuation report that was presented on to them for critical decision making process in regards to the purchase of the property.
Finally, it is clear that there is gross misconduct and violation of professional code of conduct related with AICPA rules and guidelines by the Lindsey Silver in the context of performing their duties.
This is clearly based on the fact, there is no clear achievements of the core objectives related with international standards which should be faced on grounds of truthfulness and correctness of the presented information, integrity and free from conflict of interests.
There is also clear lack of the three core elements based on accounting operations which are based on expert operations through clearly indicating the truth information, lack of high degree of in the Lindsey accountants and lack of clear dependency by the DJC ventures upon Lindsey advice through their report which was misleading. America Institute of CPA. (2017). Fiduciary Standard of Care. Retrieved from http://www.aicpa.org/InterestAreas/PersonalFinancialPlanning/Resources/PracticeCenter/ProfessionalResponsibilities/Pages/FiduciaryStandardofCare.aspx
However based on the above arguments it is clear that Lindsey Silver can argue its operations based on privity of contract in the context of the DJC venture making purchase decision based the property that was owned by Garnett Food services this is based on the fact that;
Privity of contract is exhibited by the basis that there was no contractual relationship between the DJC ventures and the accounting evaluation company. This is where the company had been mandated and hired to facilitate the valuation process thus lacking liability to the injured party (DJC ventures) which is a third party with whom Lindsey Silver was not in privity of contract.
There is also lack of ultra mares in the context that the company may argue that;
The accounting firm was not aware of the intention of the report thus they had no clue the main intention of the valuation process this can be argued from the case in that the case does not indicate any contractual relationship between the two parties that is the DJC ventures and Lindsey accounting firm.
The accountant may also argue that the valuation process they did was based on the firm that was well known to them before that is Garnett food services which they had performed their business with before arguing that they never knew about existence of DJC ventures.
Lindsey Silver may also argue that the intended linkage between them and DJC ventures which evinces their professional understanding and reporting was well not known about the relationship between the two parties that is DJC ventures and Garnet food services.Hodgson Russ Attorneys’ .(2010). Preserving the Privities Defense. Retrieved from http://www.hodgsonruss.com/newsroom-publications-PreservingthePrivityDefense.html
Finally Lindsey Silver and her accountants may also argues in the context of linking conduct requirements which argues that if there is no linkage that puts the accountant in a privity relationship with the third party since the audits for the specific benefit of DJC ventures and were not actually sent to DJC ventures. Retrieved from SIPC v. BDO Sideman case.
PART 2
SURETIES AND GURANTEES
In the context where the Fifth Third Bank lends $100,000 dollars DJC (Woods, Johnson and Smith) ventures since the partners had not enough operating capital where Chuck Wagon agreed to be surety for the loan.
This then being the fact, it is clear that I case of the default by the DJC venture to repay the loan Chunk Wagon will be require by the law to repay the full amount of the loan.
This is where Chunk Wagon will be required by the law to use the same contractual rights of DJC ventures to recover the loan. Dave Ramsey. (2014). Subrogation in sureties and guarantees. Retrieved from https://subrogation.uslegal.com/subrogation-in-sureties-and-guarantee/
The surety value by Chunk Wagon will depend on the bail decided by the count if the three partners default to pay the bank loan worth $100,000 dollars.
The surety then Chunk Wagon will have all the responsibilities to ensure that the three partners are available in court any time and place in regards with the court sermons in case they default to repay the loan to the bank.
The bank has then preferred using surety rather than guarantee in the context that the law has the capability of presumes to have custody of surety.
This then in the context of the bank the bank has control of the principle while in the context of the guarantee the bank has no control of the principle while the guarantor can surrender his obligations through the use of the bail but in the case of the surety the bail cannot be used to discharged until surrender of the principle thus it’s a sure way of the bank to recover their damages. John Bouvier.(1856). A guarantor of another's obligation. Retrieved from Constitution and Laws of the United States
SECURED TRANSACTIONS AND BANKRUPTCY
In the context where Harrell’s Restaurant suppliers agreed to sell two refrigerators to DJC ventures for $17,500 dollars through Harrell’s suppliers retaining a security interest in the equipment after DJC ventures agreed to pay for the equipments in equal installments for 48 months.
This then being the case it is evident that Harrell’s suppliers as a creditor has various privileges which includes;
Harrell’s suppliers has the capability of obtaining interest when DJC ventures extends the payment terms and conditions.
It is also clear that Harrell’s suppliers are entitled to have the custody of financing statement which is a document that clearly outlines various details pertaining details of the debtor that is DJC ventures.
It is also clear that Harrell’s suppliers have custody of UCC financing statement which gives the company secured interest of the property (collateral).
In the context of the Harrell’s rights as a creditor if DJC ventures sells the two refrigerators for $750 approximately 30 days prior to filing bankruptcy it is clear that Harrell’s can be able to take possessions of the DJC ventures in the context of recovering the value of their refrigerators that is taking possessions of specified collateral instead of only receiving a portion of DJC Ventures.
In the context where Harrell’s suppliers mat not file a financing statement the outcomes based on the previous scenarios indicates that the company may lose in case DJC ventures declares its operations bankruptcy considering there will be no legal justification of the legal terms between the two parties.
The company is also in the risk of not being a custodian of important documents which acts a clear means of recovery thus may nullify any terms of sales in terms of installments thus losing its property.
EMPLOYEMENT DISCRIMINATION
In the context where DJC ventures discriminates Lopez by declining to employ her after applying for the position of manager though she did not have formal management experience despite of her working in various restaurants for more than 20 years as waitress and as a cook.
It is clear that Lopez can file discrimination case against lawsuit against DJC ventures by arguing that the company made the decision based on racial discrimination in the context that the company did not justify the reasons behind rejecting her application with no reasons.
This may be regards with assumptions made by the company based on stereotypes and assumptions about abilities, traits or performance of the Lopez based on the history of Mexicans’.
This then gives Lopez go ahead to sue the company equal employment opportunity commission (EEOC) in case the company settle the issue by indicating the reasons denying the position to hire Lopez.U.S Equal employment opportunity commission.
Lopez may also argue that she was clearly denied the position basing on the number of the employees that the company employees which is relatively higher thus there were great chances of discrimination.
However DJV venture can come into the defense in the context that;
The company can defend its position of not hiring Lopez based on the fact that she never met the threshold of shift manager position in that she never had the main requirement that was based on formal management experience.
The company can also defend its position for not hiring Lopez based on the fact that she never had any recommendations of certifying that she had the claimed experince.This is clearly indicated by the case that there was no stakeholder such as an employer that came into defense to certify the named experience.
Despite her working for 20 years the job that the company had advertized was more of management job requiring management field career that Lopez she did not have rather than just a hotel and catering position.
However, in the context where the company could only have a total of 12 employees it is very easy for the company to argue that she was not hired based on the basis of gender balance where the company may probably state they specifically required a male applicant rather than a female applicant in the case of Lopez.
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