Question
Becker, Inc., purchased the assets of Bell Corporation. A condition of the purchase agreement was that Bell retain a CPA to audit its financial statements.
Becker, Inc., purchased the assets of Bell Corporation. A condition of the purchase agreement was that Bell retain a CPA to audit its financial statements. The purpose of the audit was to determine whether the unaudited financial statements furnished to Becker fairly presented Bells financial position. Bell retained Salam & Company, CPAs, to perform the audit. While performing the audit, Salam discovered that Bells bookkeeper had embezzled $500. Salam had some evidence of other embezzlements by the bookkeeper. However, Salam decided that the $500 was immaterial and that the other suspected embezzlements did not require further investigation. Salam did not discuss the matter with Bells management. Unknown to Salam, the bookkeeper had, in fact, embezzled large sums of cash from Bell. In addition, the accounts receivable were significantly overstated. Salam did not detect the overstatement because of Salams failure to follow its audit program. Despite the foregoing, Salam issued an unqualified opinion on Bells financial statements and furnished a copy of the audited financial statements to Becker. Unknown to Salam, Becker required financing to purchase Bells assets and furnished a copy of Bells audited financial statements to City Bank to obtain approval of the loan. Based on Bells audited financial statements, City loaned Becker $600,000. Becker paid Bell $750,000 to purchase Bells assets. Within six months, Becker began experiencing financial difficulties resulting from the undiscovered embezzlements and overstated accounts receivable. Becker later defaulted on the City loan. City has commenced a lawsuit against Salam based on the following causes of action: Ordinary negligence. Constructive fraud (gross negligence).
please answer the potential outcomes of lawsuit on ordinary negligence and gross negligence, if (1) Becker files a lawsuit against Salem; & (2) Bell files a lawsuit.
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