Judge Daniel H. Wells is currently deliberating over a suit filed by three stockholders against Transcontinental Corporation. The stockholders allege that Transcontinental’s year-end balance sheet was misleading because it did not accurately reflect the company’s financial position. The stockholders claim that they relied on the published financial statements and subsequently lost money on their investments in Transcontinental. The primary point at issue is that Transcontinental did not disclose anything about a contingent liability relating to a significant pending lawsuit with a supplier, which Transcontinental subsequently lost. The three stockholders contend that this information was material and relevant and should have been disclosed.
Tomorrow, Transcontinental’s accountant will take the stand. Before the lawyers for the opposing parties begin their questioning of the accountant, Judge Wells intends to ask a few questions to determine whether Transcontinental was negligent in its accounting practices. What questions should Judge Wells ask?