Sleek Corp. is a public corporation whose stock is traded on a national securities exchange. Sleek hired Garson Associates, CPAs, to audit Sleek's financial statements. Sleek needed the audit to obtain bank loans and to make a public stock offering so Sleek could undertake a business expansion program.

Before the engagement, Fred Hedge, Sleek's president, told Garson's managing partner that the audited financial statements would be submitted to Sleek's banks to obtain the necessary loans.

During the course of the audit, Garson's managing partner found that Hedge and other Sleek officers had embezzled substantial amounts of money from the corporation. These embezzlements threatened Sleek's financial stability. When these findings were brought to Hedge's attention, Hedge promised that the money would be repaid and begged that the audit not disclose the embezzlements.

Hedge also told Garson's managing partner that several friends and relatives of Sleek's officers had been advised about the projected business expansion and proposed stock offering and had purchased significant amounts of Sleek's stock based on this information.

Garson expressed an unmodified opinion on Sleek's financial statements, which did not include adjustments for or disclosures about the embezzlements and insider stock transactions. The financial statements and audit report were submitted to Sleek's regular banks, including Knox Bank. Knox, relying on the financial statements and Garson's report, gave Sleek a $2 million loan.

For items 1 though 5, select from the option list provided the cause of action, element, or defense alleged by the plaintiffs against defendant accountants or raised by the accountants. Each defense may be used once, more than once, or not at all.

Statement	Answer
Accountant's failure to perform as agreed, which resulted in a loss.
Reckless disregard for the truth substituting for intentional misstatement.
Intent or mental state element of a fraud claim.
Breach of the duty to exercise reasonable care.
Gross negligence substituting for intentional misstatement

Choices:

Scienter.

Breach of contract.

Constructive fraud.

Negligence.