Arnold Chait founded Ambassador Insurance and served as the company’s president and chief executive officer. Under state law, Ambassador was required to file an annual financial statement with the state Insurance Department. There was no requirement that these statements be audited. However, Ambassador also was required to file annual financial statements with the SEC and these statements had to be audited. To audit the annual SEC statements, Ambassador retained Price water house Coopers (PwC). Although PwC did not audit the annual statements that Ambassador filed with the state Insurance Department, those statements incorporated PwC’s loss reserves calculations from the audited annual SEC statements. 

Ultimately, when Ambassador suffered a financial collapse, its receiver—the State Insurance Commissioner—sued PwC. Specifically, the commissioner claimed that as a result of its audit of Ambassador, PwC either knew or should have known that Ambassador was only marginally solvent and should not have continued writing new insurance policies. He further alleged that if PwC had issued the adverse audit opinion that it should have, the regulators could have acted to protect Ambassador and its policyholders, claimants, and creditors. PwC defended on the grounds that Chait’s mismanagement of company should be imputed to Ambassador, thus relieving PwC of auditor liability. Should PwC be relieved from liability because of Chait’s mismanagement? Explain.