After Connect Airlines was forced into bankruptcy, the company’s stockholders brought suit against McGraw-Hill, the company’s external auditors. Two independent assumptions concerning this litigation are listed below:
a. Connect Airlines had recently issued its publicly held securities. The stockholders’ suit is brought in federal court under the Securities Act of 1933.
b. Connect Airlines is under SEC jurisdiction. The stockholders’ suit is brought in federal court alleging violations of the Securities Exchange Act of 1934.

Questions: Under each of the independent assumptions, separately explain

1. The allegations that must be proved in court by the plaintiffs and

2. Any defense the auditors can present if they are to avoid or reduce their liability.

2) Mason and Madison, CPAs, audited the financial statements of Jefferson Company that were included in Jefferson’s annual report. Subsequently, Jefferson went bankrupt and the creditors of the company brought a lawsuit against Jefferson’s management, board of directors, auditors (=Mason and Madison), and attorneys for the misstatements of the financial statements. Assume that the jury in the case decides that responsibilities for the $1 million in losses should be allocated as follows: Management: 70%; Board of Directors: 20%; Mason and Madison 5%; Attorneys 5%

Questions:

a. Under what laws would the creditors initiate this lawsuit?

b. Assuming that all the defendant in the case are financially able to pay their share of the losses, calculate the amount of losses that would be allocated to Mason and Madison.

c. Assuming that management had no financial resources, describe how Mason and Madison’s share of the losses change under Joint and Several Liability rule (You don’t need to calculate the exact amount).