Meglow Corporation, a closely held manufacturer of dresses and blouses, sought a loan from Busch Factors. Busch had previously extended $50,000 credit to Meglow but refused to lend any additional money without obtaining copies of Meglow’s audited financial statements. Meglow contacted the public accounting firm of Seavers & Dean to perform the audit. In arranging for the audit, Meglow clearly indicated that its purpose was to satisfy Busch Factors as to the corporation’s sound financial condition and to obtain an additional loan of $100,000.
Seavers & Dean accepted the engagement, performed the audit in a negligent manner, and rendered an unqualified opinion. If an adequate audit had been performed, the financial statements would have been found to be misleading.
Meglow submitted the audited financial statements to Busch Factors and obtained an additional loan of $70,000. Busch refused to lend more than that amount. After several other factors also refused, Meglow finally was able to persuade Maxwell Department Stores, one of its customers, to lend the additional $30,000. Maxwell relied upon the financial statements audited by Seavers & Dean.
Meglow is now in bankruptcy, and Busch seeks to collect from Seavers & Dean the $120,000 it loaned Meglow. Maxwell seeks to recover from Seavers & Dean the $30,000 it loaned Meglow.
a. Will Busch recover? Explain.
b. Will Maxwell recover? Explain.