Andrew Christie, a recently hired entry level staff accountant in Fallon & Goff, LLP, was assigned to audit the receivables at the Edgemere Company, a publicly traded manufacturer of roofing materials. Owing to errors in entering credit sales in late June, the last month of the fiscal year, the reported earnings, credit sales and customer receivables balances were materially misstated, though unintentionally. A class action suit attributes significant stock price declines to public announcements of the errors.

Fallon & Goff's audit program for receivables called for analytical procedures and for the confirmation of receivables balances with debtors, but neither Christie, nor the working paper review process, detected the need to follow up on unusual fluctuations in the receivables balance or in the number of days sales in receivables. Plaintiffs in a class action suit do not suggest fraud by Fallon & Goff, but do allege gross negligence.

Fallon & Goff recognizes their culpability but argues that the firm should share responsibility under The Private Securities Litigation Reform Act. In a separate action, a small investor claims Fallon & Goff is jointly-and-severally liable under the same Act.

Required:

1. To recover, what must the plaintiffs show in the class action suit?

2. Discuss both Fallon & Goff's and the small investor's claims about The Private Securities Litigation Reform Act.