Whitlow & Company is a brokerage firm registered under the Securities Exchange Act of 1934

Auditing P 5-28 (ALL PARTS)

Part 1
Whitlow & Company is a brokerage firm registered under the Securities Exchange Act of 1934. The act requires such a brokerage firm to file audited financial statements with the SEC annually. Mitchell & Moss, Whitlow’s CPAs performed the annual audit for the year ended December 31, 2009, and rendered an unqualified opinion, which was filed with the SEC along with Whitlow’s financial statements. During 2009, Charles, the president of Whitlow & Company, engaged in a huge embezzlement scheme that eventually bankrupted the firm. As a result, substantial losses were suffered by customers and shareholders of Whitlow & Company, including Thaxton, who had recently purchased several shares of stock of Whitlow & Company after reviewing the company’s 2009 audit report. Mitchell & Moss’s audit was deficient; if they had complied with auditing standards, the embezzlement, nor can their conduct. However, Mitchell & Moss had no knowledge of the embezzlement, nor can their conduct be categorized as reckless.

Required: Answer the following questions setting forth reasons for any conclusions stated.
a. What liability to Thaxton if any, does Mitchell & Moss have under the Securities Exchange Act of 1934?
b. What theory or theories of liability, if any, are available to Whitlow & Company’s customers and shareholders under common law?

Part 2
Jackson is a sophisticated investor. As such, she was initially a member of a small group that was going to participate in a private placement of $1 million of common stock of Clarion Corporation. Numerous meetings were held between management and the investor group. Detailed financial and other information was supplied to the participants. Upon the eve of completion of the placement, it was aborted when one major investor withdrew. Clarion than decided to offer $2.5 million of Clarion common stock to the public pursuant to the registration requirements of the Securities Act of 1933. Jackson subscribed to $300,000 of the Clarion public stock offering. Nine months later, Clarion’s earnings dropped significantly and as a result, the stock dropped 20% beneath the offering price. In addition, the Dow Jones Industrial Average was down 10% from the time of the offering.

Jackson sold her shares as a loss of $60,000 and seeks to hold all parties liable who participated in the public offering, including Clarion’s CPA firm of Allen, Dunn, and Rose. Although the audit was performed to conformity with auditing standards, there were some relatively minor misstatements. The financial statements of Clarion Corporation, which were part of the registration statement, contained minor misleading facts. It is believed by Clarion and Allen, Dunn, and Rose that Jackson’s asserted claim is without merit.

Required: Answer the following questions setting forth reasons for any conclusions stated.
a. If Jackson sues under the Securities Act of 1933, what will be the basis of her claim?
b. What are the probable defenses that might be asserted by Allen, Dunn, and Rose in light of these facts?


Click here for the solution: Whitlow & Company is a brokerage firm registered under the Securities Exchange Act of 1934