Cragsmore & Company, LLP was engaged to audit the financial statements of Marlowe Manufacturing, Inc., a publicly traded corporation. Prior to preparing the audit report, Susan Cragsmore, a partner, and Fred Willmore, a staff senior, reviewed the notes disclosed within the financial statements. One note reported the terms, costs, and obligations of a lease between Marlowe and Acme Leasing Company. Willmore suggested that the footnote read: "The Acme Leasing Company is owned by persons who have a 35 percent interest in the capital stock and who are officers of Marlowe Manufacturing, Inc.," although on Cragsmore's recommendation, the note was revised by substituting "minority shareholders" for "persons who have a 35 percent interest in the capital stock and who are officers."

The audit report and financial statements were forwarded to Marlowe Manufacturing for review. The officers-shareholders of Marlowe, who also owned Acme Leasing, objected to the revised wording and insisted that the footnote be changed to describe the relationship between Acme and Marlowe as an affiliation. Cragsmore agreed and issued an unqualified opinion that appears both within Marlowe's annual report to shareholders and within Form 10-K to the SEC. The audit working papers included drafts of the wording of the footnote. Thereafter, Marlowe suffered a substantial, uninsured fire loss and was forced into bankruptcy. The failure of Marlowe to carry any fire insurance coverage was not reported in the financial statements.

Attorneys representing Cragsmore & Company reveal in a private meeting with Susan Cragsmore that the plaintiffs may have grounds to allege fraud or gross negligence and, since the footnote was included within Form 10-K, the plaintiffs' attorneys may even have grounds to argue criminal liability.

Required: 

Discuss the grounds on which the plaintiffs could allege fraud, gross negligence, and criminal liability against Cragsmore & Company.