Question

Starr Corp. approved a plan of merger with Silo Corp. One of the determining factors in approving the merger was the strong financial statements of Silo, which were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo's financial statements. While performing the audit, Cox failed to discover material fraud, which subsequently caused Starr to suffer substantial losses. For Cox to be liable under common law under the Ultramares decision, Starr, at a minimum, must prove that Cox:

a. was a party to the fraud.
b. acted recklessly or with a lack of reasonable grounds for belief.
c. failed to exercise due care.
d. was grossly negligent.

Answer 1

Cox & Co., CPAs can be held liable under common law if they were a party to the fraud, acted recklessly or with a lack of reasonable grounds for belief, or failed to exercise due care. Correct option is b.

Step-by-step explanation:

In order for Cox & Co., CPAs to be liable under common law under the Ultramares decision, Starr Corp. must prove that Cox:

1. Was a party to the fraud: This means that Cox was directly involved in the fraudulent activity that caused Starr to suffer losses.
2. Acted recklessly or with a lack of reasonable grounds for belief: This refers to Cox's actions or failure to act in a manner that a reasonable person in their position would have done, given the circumstances.
3. Failed to exercise due care: This means that Cox did not fulfill their duty to exercise the level of care and diligence that is expected from a professional auditor.

While gross negligence may be a factor in some jurisdictions, it is not a specific requirement under the Ultramares decision in order for Cox to be held liable.