Accountants’ Liability 

Over the last few years, the prestigious FIU School of Accounting graduated a record number of students, who eventually went on the pass the CPA exam and start their careers in accountancy.  Many of the graduates took different paths, but several somehow found themselves facing legal issues that they should have prepared themselves for while studying Business Law with Prof. T.Martha set up an accounting practice in South Beach.  She provides various accounting services to Cardozo Corporation, her only client. The services include preparing Cardozo’s financial reports and audit opinions based on the reports. The CEO at Cardozo Corporation made 30 copies of Martha’s audit opinion and circulated same to several banks and potential private investors, looking for an infusion of capital into the company; the reports were also circulated to several industrial suppliers, hoping to buy much needed equipment on credit. That year, Cardozo fell into serious financial trouble, but neither Martha’s reports nor her audit opinion letters indicate this problem. Relying on Martha’s work product of Cardozo’s financial situation, BancoAmerico loans Cardozo Corporation three million dollars to fund a new manufacturing facility, and Wright Machinery supplies (on credit) two million dollars of heavy-duty industrial equipment to Cardozo Corporation to build the facility.  During the course of her engagement, Martha was aware of the fact that her work product would be used to secure a loan from a bank, but she did not know the exact bank from which credit was requested or how much money the Cardozo was requesting from the bank; furthermore, she did not know that her reports would be distributed to any other party.Charlotte set up an office in Fort Lauderdale, and she was lucky enough to be engaged by Softy, Inc., an upstart software development firm that was planning to go public.  Charlotte prepared the expertise portion of the registration statement and prospectus, filed with the Securities Exchange Commission, for the IPO of Softy. Charlotte took her job very seriously and spent a great deal of time preparing the registration statement. A year after the registration statement was filed with the SEC, the SEC and the DOJ began to investigate the company, and they claim that the information in Charlotte’s statement was misleading because some of the information given to her by the corporation (on which she based her report) was false. Charlene had tried to verify the information in the course of her engagement, but she was not able to do so. Prior to those investigations commencing, but later that year, the same financial statements that were used in the expertise portion of the registration statement were forwarded to the SEC as part of the filing requirements for a proposed merger between Softy and Hardy Corporation, a manufacturer of hard drive components. Anticipating a surge in the value of the company after the proposed merger, many more investors purchased stock in Softy.  But the hard fact was that the company was insolvent, and the merger was not concluded.

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