Consider the following scenario. Tony Howard, a CPA, has completed the audit of Galaxy Enterprise and has signed an opinion letter stating that Galaxy’s books have been prepared “in conformance with generally accepted accounting principles” and “present fairly” the company’s financial position and the results of its operations. The financial statements look good to a group of twenty investors, and relying on Tony’s opinion letter, they decide to invest $50,000 each in the equity (i.e., purchase common stock) of Galaxy. Soon thereafter, Galaxy is forced to declare bankruptcy; all twenty investors lose their entire investments. It is later revealed that Galaxy’s financial statements were in error at the time of the audit.

a. What recourse do the investors have to recover their investments?

b. What arguments would you expect Tony to make in an effort to defend himself in court?

c. Would you expect Tony to carry liability insurance to protect himself in the event of a lawsuit?