Perfect Products Co. applied for a substantial bank loan from Capitol City Bank. In connection with its application. Perfect engaged William & Co., CPAs, to audit its financial statements. William completed the audit and rendered an un¬

qualified opinion. On the basis of the financial statements and William's opinion, Capitol granted Perfect a loan of $500,000.

Within three months after the loan was granted. Perfect filed for bankruptcy. Capitol promptly brought suit against William for damages, claiming that it had relied to its detriment on misleading financial statements and the unqualified opinion of William.William's audit workpapers reveal negligence and possible other misconduct in the performance of the audit. Nevertheless, William believes it can defend against liability to Capitol based on the privity defense.

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

a. Explain the privity defense and evaluate its application to William.

b. What exceptions to the privity defense might Capitol argue?