Question

the certified public accounting partnership of james, guinn, and head prepared a certified audit report of four corporations, known as the paschal enterprises, with knowledge that their report would be used to induce shatterproof glass corp. to lend money to those corporations. the report showed the corporations to be solvent when in fact they were insolvent. shatterproof relied on the audit report, loaned approximately $500,000 to the four corporations, and lost almost all of it because the liabilities of the companies were in excess of their assets. shatterproof claimed that james and other accountants had been negligent in preparing the report and sued them to recover the loss on the loan. the accountants raised the defense that they had been retained not by shatterproof but by paschal. was this defense valid?

Answer 1

The accountants' defense is likely invalid as they had a duty to prepare accurate reports, knowing third parties would rely on them. The situation parallels researchers' expectations to spot statistical issues in their co-authors' work.

Step-by-step explanation:

The defense raised by the accountants in the case of the audit report for Paschal Enterprises presented to Shatterproof Glass Corp. is not likely to be valid because the accountants must understand their report may be relied upon by third parties, especially when they are aware that it will be used to induce lending. The responsibility falls upon the accountants to ensure accuracy and due diligence in their reporting.

This scenario is akin to the case of the researcher Stapel, whose co-authors should have identified statistical discrepancies in the data they were presented with. Similar to how Stapel's co-authors were expected to have a fundamental understanding of statistics, James, Guinn, and Head, as certified public accountants, should possess and apply a foundational knowledge of their practice when preparing audit reports to prevent negligent misrepresentation.