A local court is in the process of ruling on whether the public accounting firm of James Willis should be required to pay all or part of $16 million in damages relating to Geiger Co. for failing to detect a scheme to defraud the company, a former audit client.

Geiger Co., an SEC registrant, charges that Willis was negligent in failing to discover fraud committed by the company's controller and wants Willis to foot the bill for all $16 million in claims by and against the company. The company claims that if it had known about the fraud, it could have stopped it and recovered financially. The bank involved claims that it granted the loan based on misstated financial statements. The shareholder's involved claim that they purchased the stock on the American Stock Exchange at an inflated price due to the misstated financial statements.

Assume that Willis performed that audit with ordinary negligence and this ordinary negligence is the reason that the defalcation was not discovered and recovered.

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1. Assume that the case is brought under the Securities Act of 1933. Also assume that the stock involved had been issued to the public for the first time and the fraudulent financial statements involved had been included in a registration statement for the securities. Answer the following from the perspective of CPA liability under that act.

Should Willis be found liable if sued by shareholders who invested in the stock of the company? Assume these investors invested relying upon the misstated financial statements and as a result thereof lost $3 million?

A: No

B: More information needed to determine the liability

C: Yes

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2. Assume that Willis performed that audit with ordinary negligence and this ordinary negligence is the reason that the defalcation was not discovered and recovered.

Assume that the case is brought under common law, and that the state in which Geiger Co. is headquartered follows the Ultramares Approach for third party legal liability. Answer the following question:

Should Willis be found liable to the company, Geiger Co., itself?

A: No

B: More information is needed to determine the liability

C: Yes

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3. Assume that the case is brought under common law, and that the state in which Geiger Co. is headquartered follows the Restatement of Torts Approach for third party legal liability. Answer the following from the perspective of

Should Willis be found liable if sued by a bank that used the financial statements as a basis for providing a loan and, due to the misstatement, lost $5million on the loan?

A: Yes

B: No

C: More information is needed to determine the liability

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4. Assume that the case is brought under Security Act of 1933. Answer the following from the perspective of CPA liability under that act.

Should Willis be found liable if sued by shareholders who invested the stock of the company.Assume these investors invested relying upon the misstated financial statements and as a results thereof lost $3,000,000

A: YES

B: NO

C: MORE INFORMATION IS NEEDED TO DETERMINE THE LIABILITY

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5. Assume that the case is brought under common law, and that the state in which Geiger Co. is headquartered follows the Rosenblum Approach for third party legal liability. Answer the following question:

Should willis be found liable if sued by shareholders who invested in the stock of the company.Assume these investors invested relying upon the misstated financial statements and as a results thereof lost $3,000,000.

A: NO

B: YES

C: MORE INFORMATION IS NEEDED TO DETERMINE THE LIABILITY

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6. Assume that the case is brought under Security Act of 1933.

Should Willis be found liable to the company, Geiger CO, itself?

A: NO

B: YES

C: MORE INFORMATION IS NEEDED TO DETERMINE THE LIABILITY

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7. Assume that the case is brought under Security Act of 1933. Answer the following from the perspective of CPA liability under that act.

Should Willis be found liable if sued by a bank that used the financial statements as a basis for providing a loan and due to the misstatement, lost $5,000,000 on the loan?

A: NO

B: YES

C: MORE INFORMATION IS NEEDED TO DETERMINE THE LIABILITY

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8. Assume that the case is brought under common law, and that the state in which Geiger Co. is headquartered follows the Restatement of Torts Approach for third party legal liability. Answer the following question:

Should willis be found liable if sued by shareholders who invested in the stock of the company.Assume these investors invested relying upon the misstated financial statements and as a result thereof lost $3,000,000.

A: NO

B: YES

C: MORE INFORMATION IS NEEDED TO DETERMINE THE LIABILITY

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9. Assume that the case is brought under the Securities Exchange Act of 1934. Answer the following from the perspective of CPA liability under that act.

Should Willis be found liable if sued by shareholders who invested in the stock of the company? Assume these investors invested relying upon the misstated financial statements and as a result thereof lost $3,000,000 ?

A: NO

B: YES

C: MORE INFORMATION IS NEEDED TO DETERMINE THE LIABILITY