Butler Manufacturing Corporation raised capital for a plant expansion by borrowing from a bank and making a stock offering. Butler engaged Weaver, CPA, to audit its December 2014 financial statements. Butler told Weaver that the financial statements would be given to Union Bank and certain other named banks and included in a registration statement for the stock offering. In performing the audit, Weaver did not confirm accounts receivable and therefore failed to discover a material overstatement. Weaver also was aware of a pending class action product liability lawsuit that was not disclosed in Butler’s financial statements. Despite being advised by Butler’s legal counsel that the entity’s potential liability under the lawsuit would result in material losses, Weaver issued an unmodified opinion on Butler’s financial statements. In May 2015, Union Bank relied on the financial statements and Weaver’s opinion to grant Butler a $ 500,000 loan. Butler raised additional funds in November 2015 with a $ 14,000,000 unregistered offering of preferred stock. This offering was sold directly by the entity to 40 non-accredited private investors during a one- year period.
Shortly after obtaining the Union Bank loan, Butler experienced financial problems but was able to stay in business because of the money raised by the stock offering. Butler lost the product liability suit, resulting in a judgment that the entity could not pay. Butler also defaulted on the Union Bank loan and was involuntarily petitioned into bankruptcy. This caused Union Bank to sustain a loss and Butler’s stockholders’ investments became worthless.
Union Bank sued Weaver for failure to provide the appropriate level of professional care and for common law fraud. The stockholders who purchased Butler’s stock through the offering sued Weaver, alleging fraud under section 17 of the Securities Act of 1933.
These transactions took place in a jurisdiction providing for auditors’ liability for ordinary negligence to known and intended users of financial statements.

Answer the following questions and give the reasons for your conclusions.
a. Will Union Bank be successful in its suit against Weaver under common law for
(1) Ordinary negligence and
(2) Fraud?
b. Will the stockholders who purchased Butler’s stock through the offering succeed against Weaver under the antifraud provisions of section 17 of the Securities Act of 1933?

  • CreatedOctober 27, 2014
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