Marino Rossi, a public accountant, audited the financial statements of Newfoundland Rugs Ltd. Cooke, the president of

Question:

Marino Rossi, a public accountant, audited the of Newfoundland Rugs Ltd. Cooke, the president of Newfoundland Rugs, told Marino that the company was planning a private placement of company bonds to raise $500,000 of needed capital. The audit proceeded smoothly, and the audited were issued.
Unknown to Marino, several significant receivables represented consignment accounts and not receivables, but Cooke had persuaded the companies involved to sign the receivable confirmations Marino had sent out, indicating they agreed that they owed the balances reported at the date. In addition, a large number of rolls of low- quality interior carpeting had been classed as first quality. The effect of these two fraudulent acts resulted in a profit of $150,000 (instead of a loss of $480,000) and a positive net worth (instead of a negative net worth).
Newfoundland Rugs borrowed the money on the private placement and then went bankrupt several months later.
REQUIRED
a. Could the private-placement lenders succeed in a suit against Marino? If so, what must they prove?
b. What defense would Marino use?
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