Farr and Madison, PAs, audited Glamour Inc. Their audit was deficient in several respects:

1. Farr and Madison failed to properly audit certain receivables, which later proved to be fictitious.

2. With respect to other receivables, although they made a cursory check, they did not detect many accounts that were long overdue and obviously uncollectible.

3. No physical inventory was taken of the securities claimed to be in Glamour’s possession, which, in fact, had been sold. Both the securities and cash received from the sales were listed on the balance sheet as assets.

There is no indication that Farr and Madison actually believed the financial statements were false. Subsequent creditors, not known to Farr and Madison, are now suing based on the deficiencies in the audit described above. Farr and Madison moved to dismiss the lawsuit against it on the basis that the firm did not have actual knowledge of falsity and, therefore, did not commit fraud.

Required:

May the creditors recover without demonstrating that Farr and Madison had actual knowledge of falsity? Explain.