The public accounting firm of Hanson and Brown was expanding very rapidly. Consequently, it hired several staff assistants, including James Small. Subsequently, the partners of the firm became dissatisfied with Small's production and warned him that they would be forced to discharge him unless his output increased significantly. At that time, Small was engaged in audits of several clients. He decided that, to avoid being fired, he would reduce or omit entirely some of the required auditing procedures listed in the audit plan prepared by the partners. One of the public accounting firm's non-SEC clients, Newell Corporation, was in serious financial difficulty and had adjusted several of its accounts being examined by Small to appear financially sound. Small prepared fictitious working papers in his home at night to support purported completion of auditing procedures assigned to him, although he in fact did not examine the Newell adjusting entries. The public accounting firm rendered an unqualified opinion on Newell's financial statements, which were grossly misstated. Several creditors, relying upon the audited financial statements, subsequently extended large sums of money to Newell Corporation. Required: Would the public accounting firm be liable to the creditors who extended the money in reliance on the erroneous financial statements if Newell Corporation should fail to pay its creditors? Explain. Sawyer and Sawyer, CPAs, audited the financial statements of Rattler Corporation that were included in Rattler's Form 10-K, which was filed with the SEC. Subsequently, Rattler Corporation went bankrupt and the stockholders of the corporation brought a class-action lawsuit against management, Sawyer and Sawyer, and the corporation's board of directors and attorneys for misstatements of the financial statements. Assume that the jury in the case decides that responsibility for $5 million in losses should be allocated as follows: Required: a. Under what securities act would the stockholders initiate this lawsuit? b. Assuming that all the defendants in the case are financially able to pay their share of the losses, calculate the amount of losses that would be allocated to Sawyer and Sawyer. c. Assuming that management had no financial resources, describe how Sawyer and Sawyer's share of the losses might be increased. The international CPA firm of Arthur Andersen faced significant liability in conjunction with its audits of Enron Corporation. Required: a. From a legal liability perspective, describe the unique features of this audit case. b. Describe the important implications of this audit case for a firm of public accountants. Gordon \& Moore, CPAs, were the auditors of Fox \& Company, a brokerage firm. Gordon \& Moore examined and reported on the financial statements of Fox, which were filed with the Securities and Exchange Commission. Several of Fox's customers were swindled by a fraudulent scheme perpetrated by two key officers of the company. The facts establish that Gordon \& Moore were negligent, but not reckless or grossly negligent, in the conduct of the audit, and neither participated in the fraudulent scheme nor knew of its existence. The customers are suing Gordon \& Moore under the antifraud provisions of Section 10 (b) and Rule 10b5 of the Securities Exchange Act of 1934 for aiding and abetting the fraudulent scheme of the officers. The customers' suit for fraud is predicated exclusively on the negligence of the auditors in failing to conduct a proper audit, thereby failing to discover the fraudulent scheme. Required: Answer the following, setting forth reasons for any conclusions stated. a. What is the probable outcome of the lawsuit? Explain. b. What other theory of liability might the customers have asserted