Auditors Liability under Securities Exchange Act of 1934.Adam, an Illinois resident, was interested in purchasing stock in Joshua Foods Inc. Joshua Foods has corporate headquarters in Fond du Lac, Wisconsin, and is incorporated in Delaware. Adam accessed Joshua Foods 2017 annual report including the financial statements on its corporate website. Adam also reviewed several analysts opinions on the Internet, including the opinions provided from his Internet broker, Matthew & Co. ExpressTrade. Adam received the annual report in the mail. Based on the increasing revenues, the $8 million net income indicated on the financial statements, and the other information received from the analysts, Adam purchased $350,000 worth of stock.

Three months later, Joshua Foods announced that over the past three years, the company had included $25 million of fictitious revenue and had capitalized more than $30 million of page 719charges that should have been expensed. These irregularities will result in a restatement of the fiscal 2017 financial statements, resulting in a $1,250,000 loss for fiscal 2017. The press release from the company says that it will likely declare bankruptcy in the next few weeks. In the following two weeks, the value of Adams holdings in the stock declined to $50,000.

Required:

You are the attorney for Joshua Foods auditors. It is apparent that Adam will try to recover losses from your firm. List the defenses you would prepare to protect the auditors from liability.