Risk Capital Limited, a publicly held Delaware corporation, was considering the purchase of a substantial amount of the treasury stock held by Florida Sunshine Corporation, a closely held corporation. Initial discussions with the Florida Sunshine Corporation began late in 20X0.
Wilson and Wyatt, CPAs, Florida Sunshine’s public accountants, regularly prepared quarterly and annual unaudited financial statements. The most recently prepared unaudited financial statements were for the fiscal year ended September 30, 20X0.
On November 15, 20X0, after protracted negotiations, Risk Capital agreed to purchase 100,000 shares of no-par Class A treasury stock of Florida Sunshine at $12.50 per share. However, Risk Capital insisted upon audited statements for the calendar year 20X0. The contract specifically provided: “Risk Capital shall have the right to rescind the purchase of said stock if the audited financial statements of Florida Sunshine for calendar year 20X0 show a material adverse change in the financial position of the Corporation.”
At the request of Florida Sunshine, Wilson and Wyatt audited the company’s financial statements for the year ended December 31, 20X0. The December 31, 20X0, audited financial statements furnished to Florida Sunshine by Wilson and Wyatt showed no material adverse change from the September 30, 20X0, unaudited statements. Risk Capital relied upon the audited statements and purchased the treasury stock of Florida Sunshine. It was subsequently discovered that, as of the balance sheet date, the audited statements contained several misstatements and that in fact there had been a material adverse change in the financial position of the corporation. Florida Sunshine has become insolvent, and Risk Capital will lose virtually its entire investment.
Risk Capital seeks recovery against Wilson and Wyatt.
a. Discuss each of the theories of liability that Risk Capital will probably assert as its basis for recovery.
b. Assuming that only ordinary negligence by Wilson and Wyatt is proved, will Risk Capital prevail? State yes or no and explain.