The CPA firm of Martinson, Brinks \& Sutherland, a partnership, was the auditor for Masco Corporation, a medium-sized wholesaler. Masco leased warehouse facilities and sought financing for leasehold improvements to these facilities. Masco assured its bank that the leasehold improvements would result in a more efficient and profitable operation. Based on these assurances, the bank granted Masco a line of credit.

The loan agreement required annual audited financial statements. Masco submitied its \(19 \times 0\) audited financial statements to the bank which showed an operating profit of \(\$ 75,000\), leasehold improvements of \(\$ 250,000\), and net worth of \(\$ 350,000\). In reliance thereon, the bank loaned Masco \(\$ 200,000\). The audit report which accompanied the financial statements disclaimed an opinion because the cost of the leasehold improvements could not be determined from the company's records. The part of the audit report dealing with leasehold improvements reads as follows:

Additions to fixed assets in 19X0 were found to sclude principally warehouse improvements. Practically all of this work was done by company employees and the cost of materials and overhead were paid by Masco. Unfortunately, fuliy complete detailed cost records were not kept of these leasehold improvements and no exact determination could be made as to the actual cost of said improvements. The total amount capitalized is set forth in note 4.

In late 19X1, Masco went out of business, at which time it was learned that the claimed leasehold improvements were totally fictitious. The labor expenses charged as leasehold improvements proved to be operating expenses. No item of building material cost had been recorded. No independent investigation of the existence of the leasehold improvements was made by the auditors. If the \(\$ 250,000\) had not been capitalized, the income statement would have reflected a substantial loss from operations and the net worth would have been correspondingly decreased.

The bank has sustained a loss on its loan to Masco of \(\$ 200,000\) and now seeks to recover damages from the CPA firm, alleging that the accountants negligently audited the financial statements.

{Required:}

Answer the following, setting forth reasons for any conclusions stated.

a. Will the disclaimer of opinion absolve the CPA firm from liability?

b. Are the individual partners of Martins , Brinks \& Sutherland, who did not take part in the audit, liable?

c. Briefly discuss the development of the common law regarding the liability of CPAs to third parties.