B-

Ward & East, CPAs, were the auditors of Southern Development, Inc., a real estate company that owned several shopping centres. It was Southern's practice to let each shopping centre manager negotiate that centre's leases; they thought that such an arrangement resulted in much better leases because a local person did the negotiating. Two of the centre managers were killed in a plane accident returning home from a company meeting at the head office in phoenix. In both cases, the new managers appointed to take their places discovered kickback schemes in operation; the managers had negotiated lower rents than normal in return for kickbacks from the tenants. Southern brought in a new CPA firm, Jasper & Co., to investigate the extent of the fraud at those two locations and the possibility of similar frauds at other centres. Jasper & Co. completed their investigation and found that four locations were involved quite independently of each other and that the total loss over 5 years was more than $1 million. Southern sued Ward & East for negligence for $1 million plus interest.

Required: What type of accusations is placed against the auditor? Also, what type of defences would Ward & East use? What would they have to prove?