Question: Dandy Container Corporation engaged the accounting firm of Adams and

Dandy Container Corporation engaged the accounting firm of Adams and Adams to audit financial statements to be used in connection with an interstate public offering of securities. The audit was completed, and an unqualified opinion was expressed on the financial statements that were submitted to the Securities and Exchange Commission along with the registration statement. Two hundred thousand shares of Dandy Container common stock were offered to the public at $11 a share. Eight months later the stock fell to $2 a share when it was disclosed that several large loans to two “paper” corporations owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporations, which was owned by the director. These facts were not disclosed in the financial statements. The director involved and the two corporations are insolvent.

State whether each of the following statements is true or false, and explain why.
a. The Securities Act of 1933 applies to the above-described public offering of securities.
b. The accounting firm has potential liability to any person who acquired the stock.
c. An insider who had knowledge of all the facts regarding the loans to the two paper corporations could nevertheless recover from the accounting firm.
d. In court, investors who bought shares in Dandy Container need only show that they sustained a loss and that failure to explain the nature of the loans in question constituted a false statement or misleading omission in the financial statements.
e. The accountants could avoid liability if they could show they were not negligent.
f. The accountants could avoid or reduce the damages asserted against them if they could establish that the drop in the stock’s market price was due in whole or in part to other causes.
g. The Securities and Exchange Commission would defend any action brought against the accountants in that the SEC examined and approved the registration statement.

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  • CreatedOctober 25, 2014
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