Auditing P 5-28
Jackson is a sophisticated investor.
As such, she was initially a member of a small group that was going to
participate in a private placement of $1 million of common stock of
Clarion Corporation. Numerouis meetings were held between management
and the investor group. Detailed financial and other information was
supplied to the participants. Upon the eve of completion of the
placement, it was aborted when one major investor withdrew. Clarion
than decided to offer $2.5 million of Clarion common stock to the
purble pursuant to the registration requirements of the Securities Act
of 1933. Jackson subscribed to $300,000 of the Clarion public stock
offering. Nin months later, Clarion’s earnings dropped significantly,
and as a result, the stock dropped 20% beneath the offering price. In
addition, the Dow Jones Industrial Average was down 10% from the time
of the offering.
Jackson sold her shares as a loss of $60,000 and
seeks to hold all parties liable who participated in the public
offering, including Clarion’s CPA firm of Allen, Dunn, and Rose.
Although the audit was performed to conformity with auditing standards,
there were some relatively minor misstatements. The financial
statements of Clarion Corporation, which were part of the registration
statement, contained minor misleading facts. It is believed by Clarion
and Allen, Dunn, and Rose that Jackson’s asserted claim is without
Required: Answer the following questions setting forth reasons for any conclusions stated.
a. If Jackson sues under the Securities Act of 1933, what will be the basis of her claim?
b. What are the probable defenses that might be asserted by Allen, Dunn, and Rose in light of these facts?
Auditing P 5-28