Discussion – Sarbanes-Oxley Act
Question 1: If Shuebke’s review was conducted in good faith and conformed to generally accepted accounting principles, could Superior hold Shuebke Delgado liable for negligently failing to detect material omissions in Chase’s audit? Why or why not?
Yes, Superior Wholesale Corporation can still hold Shuebke liable for negligence for failing to detect material omissions in the financial statements. It should be understood that for superior hiring Shuebke to conduct an audit, it was sure that Shuebke is a reputable auditing firm that knows and understands every detail of auditing and how firms can misrepresent their financial information. Shuebke’s main task was to check every detail to confirm that Regal had not misrepresented financial data and that the financial information given was accurate. Since Shueblke failed to identify the overstatement of the inventory and the understatement of the taxes, it clearly shows that it did not carry out its work as a professional auditing firm.[1] The overstatement and understatement of the elements are dominant misrepresentations that an auditing firm cannot fail to identify.[2] Therefore, it is clear that Shuebke did not consider everything during the auditing process, which is why it failed to point out the misrepresentation.[3] Therefore, Superior Wholesale is liable for negligence of duty; hence, Superior Wholesale can successfully sue it in a court of law. Hire our assignment writing services in case your assignment is devastating you.
Question 2: According to the rule adopted by most courts to determine accountants’ liability to third parties, could Chase be liable to the Superior? Explain.
No. Chase cannot be liable to superior wholesalers; it is Regal who is liable to Superior wholesalers. The relationship between Regal and Chase is that of a principal-agent relationship. Chase is an employee or an agent to Regal. Thus, any wrongful act committed by Chase in discharging its duties makes the principal Regal liable. Therefore, Superior cannot sue Chase independently, but can only sue Regal, the employer, or the principal.[4] Superior can only mention Chase as one respondent to the case in its legal suit, but it cannot directly sue Chase. Therefore, Chase is in no way liable to Superior; the parties liable are Regal and Shuebke firms.
Question 3: Generally, what requirements must be met before Superior can recover damages under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5? Can Superior meet these requirements?
Superior must meet the requirements before recovering the damage according to Section 10(b) and Rule 10b-5; first, Superior wholesalers must prove that it has suffered losses because of the fraudulent act that Regal had committed.[5] Moreover, Superior must prove to the court that it had done due diligence before purchasing Regal.[6] For instance, it can be argued that it did not just sign the contract of buying. Still, it took action by conducting a reputable auditing firm, Shuebke, to carry out an auditing investigation as part of the due diligence to establish whether Regal’s financial statements were fairly represented. Superior wholesalers should also prove to the court that Regal did not disclose the material facts in its financial statements but had colluded with the internal auditing firm Chase to overstate the inventory and understate the tax.[7] Based on the facts available, the Superior can meet the requirements and hence qualify for the recovery of the damages.
Question 4: Suppose that a court determined that Chase had aided Regal in willfully understating its tax liability. What is the maximum penalty that could be imposed on Chase?
The maximum penalty that would be imposed on Regal if it is determined that Chase aided Regal in understating its tax and overstating its inventory will be the difference between the fair value that Superior got with the fair value of what Superior wholesalers could have gotten if there was no misrepresentation of both the tax and the inventory.[8] Regal would be required to pay the difference to Superior wholesalers as damage recovery. Sect 10(b) directs that a firm has been found guilty of committing fraud during the transactions.[9] The plaintiff form would be compensated the sum equivalent to the difference between the fair value of what the plaintiff got and the fair value of what it could have gotten in case there was no misrepresentation of the facts or fraud.
Debate
The suggestion that only the largest public-traded companies should be subjected to the Sarbanes Oxley Act is wrong. The Sarbanes Oxley Act is there to bring sanity to the corporate world. Therefore, both large and small companies should be required to adhere to the provisions of this Act. In my opinion, even private companies should be incorporated into this Act because there is a lot of fraud in the private sector that needs to be checked. In other words, the Sarbanes Oxley Act rules should apply to all corporations to create a good environment for the investors.
Bibliography
ABA. (2014). Section 10(b) Litigation: The Current Landscape. Available at https://www.americanbar.org/groups/business_law/publications/blt/2014/10/03_kasner. Accessed on 8th June 2021.
Grundfest, J. (2014). Damages and Reliance Under Section 10(b)of the Exchange Act. The Business Lawyer; Vol. 69
Miller, R. (2017). Business Law today. Cengage Learning.
[1] Miller, R. (2017). Business Law today. Cengage Learning.
[2] ABA. (2014). Section 10(b) Litigation: The Current Landscape. Available at https://www.americanbar.org/groups/business_law/publications/blt/2014/10/03_kasner. Accessed on 8th June 2021.
[3] Miller, R. (2017).
[4] Miller, R. (2017).
[5] Grundfest, J. (2014). Damages and Reliance Under Section 10(b)of the Exchange Act. The Business Lawyer; Vol. 69
[6] Miller, R. (2017).
[7] ABA. (2014). Section 10(b)
[8] Grundfest, J. (2014).
[9] Miller, R. (2017).
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Question 
Answer the 4 questions based on the information given. Then, discuss your position on the debate on this topic. When you are responding to the “Debate this” prompt, I do not want you to simply state whether you agree with the statement or disagree with the statement. I want you to explain the WHY. I want you to have material to back up your position. I want to see the support. What is your source? Additionally, when you post your final comment, don’t simply say I agree.
Discussion – Sarbanes-Oxley Act
Debate This: Sarbanes-Oxley Act
From Business Law II
Chapter 40, P. 965
Superior Wholesale Corporation planned to purchase Regal Furniture, Inc. and wished to determine Regal’s net worth. Superior hired Lynette Shuebke of the accounting firm Shuebke Delgado to review an audit that had been prepared by Norman Chase, the accountant for Regal. Shuebke advised Superior that Chase had performed a high-quality audit and that Regal’s inventory on the audit dates was stated accurately on the general ledger. As a result of these representations, Superior went forward with its purchase of Regal.
After the purchase, Superior discovered that the audit by Chase had been materially inaccurate and misleading, primarily because the inventory had been grossly overstated on the balance sheet. Later, a former Regal employee who had begun working for Superior exposed an e-mail exchange between Chase and former Regal chief executive officer Buddy Gantry. The exchange revealed that Chase had cooperated in overstating the inventory and understating Regal’s tax liability. Using the information presented in the chapter, answer the following questions.
1. If Shuebke’s review was conducted in good faith and conformed to generally accepted accounting principles, could Superior hold Shuebke Delgado liable for negligently failing to detect material omissions in Chase’s audit? Why or why not?
2. According to the rule adopted by the majority of courts to determine accountants’ liability to third parties, could Chase be liable to the Superior? Explain.
3. Generally, what requirements must be met before the Superior can recover damages under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5? Can Superior meet these requirements?
4. Suppose that a court determined that Chase had aided Regal in willfully understating its tax liability. What is the maximum penalty that could be imposed on Chase?
Debate This:
Only the largest publicly held companies should be subject to the Sarbanes-Oxley Act.