Thomas Emerson ACCT 452 5-56

A) A CPA firms potential liability to third parties is increased in an audit that is included in an SEC
registration as they might become liable for any losses that arose because in the case that financial
statements used in the registration statement might have contained an untrue statement of a material
fact or omitted to state a material fact required the CPAs could become liable for losses depending
on which version of the act the suit is brought under. If under the 1933 act, if it can be proven that the
losses were caused by the misstated financial statements, or if they did not perform the audit with due
diligence, then they might be held liable for all of the plaintiffs losses which might be quite considerable
in the event of an initial public offering of a company that presented misstated financial statements.
The 1934 act also makes the auditors not only liable to those who originally purchased the securities,
but also those who subsequently bought them on the secondary market. Under the 1934 Act, the
auditors have more defenses available to them but they face a larger liability if it is found that they
performed the audit without good faith as there would most likely be a larger pool of potential
claimants since secondary investors can also sue. However, the 1934 act also introduces proportionate
liability which limits their liability caused by other parties involved.

B) The implications of the IRS investigation need to be carefully investigated and managed before the
effective date of the financial statements is reached. Since these financial statements were presented in
a registration statement, Marshall & Wyatt need to take extreme care that they proceed with the proper
reporting and disclosure. Although I cant recall any related readings in chapter 5, this kind of event
would most likely meet the definition of a subsequent event in that it is after the date of the financial
statements but before they are presented, in this case the event and any possible losses because of it
need to be fully disclosed. The information that came to light has provided additional evidence about
conditions that existed as of the balance sheet date, and need to be reported on according to GAAP.
The auditors should review the companies tax returns and evaluate for themselves if they think the IRS
claim has standing and whether it should be disclosed accordingly or adjustments should be made to
the financial statements.


C) CPAs do not enjoy the same kind of protected status as lawyers, medical professionals and the like.
Materials obtained and created by CPAs are subpoenable and the firm rightfully complied with the
letter of the law as it could not have refused this request without further legal action being brought
against them.