brokerage firm and member of a national stock exchange.

Auditing P 5-26 Gordon & Groton, CPA’s were the auditors of Bank
& Company, a brokerage firm and member of a national stock exchange.
Gordon & Groton audited and reported on the financial statements of
Bank, which were filed with the Securities and Exchange Commission.
Several
of Bank’s customers were swindled by a fraudulent scheme perpetrated by
Bank’s president, who owned 90% of the voting stock of the company. The
facts establish that Gordon & Groton were negligent but not
reckless or grossly negligent in conduct of the audit, and neither
participated in the fraudulent scheme or knew of its existence.
The
customers are suing Gordon & Groton under the antifraud provisions
of Section10b and Rule 10b-5 of the securities Exchange Act of 1934 for
aiding and abetting the fraudulent scheme of the president. The
customer’s suit for fraud is predicated exclusively on the nonfeasance
of the auditors in failing to conduct a proper audit, thereby failing to
discover the fraudulent scheme.
Required:
Answer the following questions, setting forth reasons for any conclusions stated:
a. What is the probable outcome of the lawsuit?
b. What other theory of liability might the customers have asserted?

 

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