Deck 15: Legal Liability

Question 1

Auditors are potentially liable for monetary damages and subject to criminal penalties for failure to perform professional services properly.

Answer 1

True

Question 2

The Private Securities Litigation Reform Act deals with lawsuits in both federal and state courts.

Answer 2

False

Question 3

The effect of section 11 of the Securities Act of 1933 is to shift the major burden of proof from auditors to the plaintiff.

Answer 3

False

Question 4

Section 11 of the Securities Act of 1933 contains the principal criteria defining civil liabilities under the statute.

Question 5

Auditors cannot be held liable to their clients for failure to detect material management fraud.

Question 6

Liability to foreseen third parties would expose auditors to a greater potential obligation than liability to foreseeable third parties.

Question 7

The restatement of torts extends liability for ordinary negligence to "foreseen" third parties who may not be explicitly known to auditors.

Question 8

The general registration form for new issues of securities is Form 10-K.

Question 9

Tort actions cover civil complaints other than breach of contract (such as failure to exercise the appropriate level of professional care).

Question 10

Actions brought under common law place most of the burden of proof on the defendant,usually auditors.

Question 11

As a defense under Rule 10b-5,auditors must prove that they acted in good faith and had no knowledge of the material misstatements in the financial statements.

Question 12

Legal liabilities of auditors may arise from lawsuits brought on the basis of the law of contracts or as tort actions.

Question 13

If auditors can prove that a reasonable examination was performed,then auditors are not liable for damages under section 11 of the Securities Act of 1933.

Question 14

Strict privity is the relationship of parties who enter into a contract together.

Question 15

Gross negligence represents a more significant departure from appropriate professional care than ordinary negligence.

Question 16

Rule 10b-5 requires that the plaintiff must prove that auditors acted with intent to deceive in order to impose liability.

Question 17

The Ultramares case holds auditors to a higher level of responsibility than the Rosenblum v.Adler case in terms of common law liability to third parties.

Question 18

Joint and several liability is a doctrine that allows a successful plaintiff to recover the full amount of a damage award from any defendant regardless of the defendant's level of culpability.

Question 19

The Securities Act of 1933 regulates subsequent trading of securities,and the Securities Exchange Act of 1934 regulates the initial issuance of securities.

Question 20

Auditors' primary defense against a claim for ordinary negligence is to offer evidence that the audit had been conducted in accordance with generally accepted auditing standards.

Question 21

Third-party plaintiffs bringing action under common law need not prove that

A) They were damaged or suffered an economic loss.
B) They relied on the financial statements.
C) The financial statements were the direct cause of loss.
D) Breach of contract occurred.

Question 22

Failure to provide any level care in fulfilling a duty owed to another party,including reckless disregard for the truth,is called

A) Breach of contract.
B) Ordinary negligence.
C) Privity.
D) Constructive fraud.

Question 23

Which of the following claims concerning the quality of auditors' work would least likely result in civil liability for damages?

A) Gross negligence amounting to constructive fraud.
B) Failure to investigate possible fraud when other entities in the industry have experienced frauds.
C) Reckless disregard of evidence that the financial statements do not conform to generally accepted accounting principles.
D) Issuing an unqualified auditors' opinion when evidence suggests that the financial statements were not prepared according to generally accepted accounting principles.

Question 24

An audit failure occurs when

A) A client goes bankrupt or has serious financial difficulty.
B) Auditors fail to conduct the examination in accordance with generally accepted auditing standards, which results in the failure to identify material misstatements in the financial statements.
C) Auditors cannot collect audit fees owed to them by the client.
D) Auditors are sued by a third party.

Question 25

Which of the following parties is most likely to recover losses resulting from acts of ordinary negligence from auditors?

A) Third parties that auditors should have foreseen could rely on the client's financial statements.
B) The auditors' client.
C) Purchasers and sellers of securities under the Securities Exchange Act of 1934.
D) Third parties whose reliance on the client's financial statements was reasonably foreseeable.

Question 26

Kerry CPA is the auditor for Sammy Corp.During the audit,Kerry discovers a material misstatement in Sammy's financial statements.Sammy's management tells Kerry that if the misstatement is corrected or if Kerry issues an opinion that indicates there is a material misstatement,Sammy Corp.will likely have to declare bankruptcy and thousands of employees will lose their jobs.Which of the following statements is true if Sammy does not correct the misstatement and Kerry issues an unqualified opinion on Sammy's financial statements?

A) Kerry is liable only to third parties in privity of contract.
B) Kerry is liable only to known users of the financial statements.
C) Kerry is likely liable to any person who suffered a loss as a result of the material misstatement.
D) Kerry is likely liable to third parties only if the third parties were aware of the material misstatements and relied on the financial statements.

Question 27

N.Lauren hires

A) It was in privity of the contract.
B) It was a primary beneficiary.
C) It was a foreseen party.
D) It was a foreseeable party.
D) Humphrey, CPA, to provide an audit of her financial statements. The engagement letter includes a statement acknowledging that audited financial statements will be provided to financial institutions for a loan but does not name any financial institution. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves the loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming that

Question 28

N.Lauren hires

A) It was in privity of the contract.
B) It was a primary beneficiary.
C) It was a foreseen party.
D) It was a foreseeable party.
D) Humphrey, CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements will be provided to Key Largo Bank for a loan. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves the loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming that

Question 29

When bringing suit against auditors under section 10(b)of the Securities Exchange Act of 1934,plaintiffs must allege and prove that

A) The financial statements in the offering registration filing contained a material misstatement.
B) The auditors were aware of material misstatements in the financial statements.
C) The auditors were guilty of ordinary negligence and failed to discover material misstatements in the financial statements.
D) The plaintiffs purchased the specific securities through a public offering and thus have a right to sue.

Question 30

N.Lauren hires

A) It was in privity of the contract.
B) It was a primary beneficiary.
C) It was a foreseen party.
D) It was a foreseeable party.
D) Humphrey, CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements are needed for a filing with a regulatory body. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves a loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming that

Question 31

N.Lauren hires

A) Breach of contract.
B) Ordinary negligence.
C) Gross negligence.
D) Constructive fraud.
D) Humphrey, CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements are required to be filed with a regulatory body by October 1. Humphrey does not complete the audit until October 5. Lauren is late filing the financial statements and is fined $100,000 by the regulatory body. Lauren would most likely sue Humphrey claiming

Question 32

Auditors should not be liable to any party if they perform services that meet the standards of

A) Ordinary negligence.
B) Regulatory providence.
C) Due care.
D) Good faith.

Question 33

Mays bought McCovey Corp.common stock in an offering registered under the Securities Act of 1933.Hart & Co.,CPAs,gave an unqualified opinion on McCovey's financial statements that were included in the registration statement filed with the Securities and Exchange Commission.Mays sued Hart under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement.Mays must prove that

A) There was fraudulent activity by Hart.
B) The financial statements contained a material misstatement.
C) Mays relied on Hart's opinion.
D) Mays was in privity with Hart.

Question 34

Elliot Corp.is interested in purchasing Roger Corp.Prior to the purchase,Elliot hired Adam & Co.to audit Roger's financial statements.During the audit,Adam failed to discover a fraud that resulted in material misstatements in Roger's financial statements.After the acquisition,the fraud was discovered,and Elliot Corp.suffered substantial losses.To sue Adam & Co.,Elliot must prove that Adam

A) Acted recklessly or with lack of reasonable grounds for belief.
B) Knew of the instances of fraud.
C) Failed to exercise the appropriate level of professional care.
D) Demonstrated gross negligence.

Question 35

A principle that may reduce or eliminates auditors' liability to clients is

A) Client's constructive negligence.
B) Client's contributory negligence.
C) Auditors' ordinary negligence.
D) Auditors' gross negligence.

Question 36

Lancaster & Company,CPAs,is auditing the financial statements of Cooper Corporation.During the course of the audit,Cooper sent the following memo to the engagement partner: "We have requested $1 million worth of products from Ladd Corporation with credit terms of net 30 days.Ladd has requested audited financial statements for its credit decision.We notified Ladd that our annual audit was in process and we would provide the audited financial statements to them as soon as they were completed."
Which of the following statements is true with regard to this memo?

A) It is an amendment to the engagement letter and makes Ladd a primary beneficiary of the audited financial statements.
B) It may move Ladd closer to a primary beneficiary and reposition it as a third party with a standing to sue, depending on the jurisdiction of any future lawsuits.
C) It is only a courtesy and does not alter the terms of the engagement letter or change the nature of Ladd's standing to sue.
D) It is an additional contract placing Ladd in privity of contract.

Question 37

Which of the following statements is true concerning auditors' responsibilities during the audit?

A) Auditors must exercise the level of care, skill, and judgment expected of a reasonably prudent auditor under the circumstances.
B) Auditors must plan the audit to gather sufficient competent evidence to guarantee the accuracy of the financial statements.
C) Auditors are strictly liable for failures to discover client fraud.
D) Auditors are not liable unless they commit gross negligence or intentionally disregard generally accepted auditing standards.

Question 38

To prevail in an action brought under common law,the plaintiff must show all of the following except

A) He or she was damaged or suffered a loss.
B) The financial statements contained a material misstatement.
C) Auditors knew the financial statements contained a material misstatement.
D) He or she relied on the financial statements.

Question 39

At the request of James Company's management,

A) The shareholders did not suffer a loss.
B) The shareholders were not primary beneficiaries of the audit engagement and they have no standing to sue.
C) The shareholders failed to prove lack of appropriate professional care on the part of auditors.
D) The shareholders did not rely properly on the financial statements.
E)G. Company audited James's financial statements and was aware that James's management intended to deliver the financial statements to its 25 shareholders for the purpose of repurchasing their shares for $50 per share (the investors had originally purchased the shares for $5 per share). The audit was conducted in accordance with generally accepted auditing standards and the financial statements were prepared in accordance with generally accepted accounting principles. Later, the shareholders sued the auditors, claiming that if they had fully realized the significance of disclosures about the market value of the assets, they could have received $75 per share from James Company. The shareholders' lawsuit will probably fail because

Question 40

If an audit is performed for the benefit of a specific person or organization,that person or organization is known as a(n)

A) Party to the contract.
B) Primary beneficiary.
C) Foreseeable third party.
D) Prime benefactor.

Question 41

Beckler & Associates,CPAs,examined and issued an unqualified opinion on the financial statements of Queen Co.The financial statements contained misstatements that resulted in a material overstatement of Queen's net worth.Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen.Beckler knew that the financial statements would be provided to Mac.Queen defaulted on the loan.Mac sued Beckler to recover for its losses associated with Queen's default.Which of the following must Mac prove in order to recover? I.Beckler did not conduct the audit with the appropriate level of professional care.
II)Mac relied on the financial statements.

A) I only.
B) II only.
C) Both I and II.
D) Neither I nor II.

Question 42

Which of the following would third parties not need to demonstrate when bringing suit against auditors for losses sustained under the Securities Act of 1933?

A) Auditors were aware of the materially misstated financial statements.
B) Third-party purchasers suffered a loss.
C) The client's financial statements contained a material misstatement.
D) Purchasers would need to demonstrate all of the above.

Question 43

Which of the following statements concerning the Ultramares Corp.v.Touche case is not true?

A) This case was brought under common law liability.
B) This case provided a test to determine whether a third party qualified as a primary beneficiary and could bring suit for ordinary negligence.
C) This case established the rights of third parties to bring suits against auditors under common law liability.
D) This case concluded that auditors' liability to third parties would be generally limited to gross negligence or fraud.

Question 44

While conducting an audit,Larson Associates,CPAs,failed to detect material misstatements included in its client's financial statements.Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client.Larson knew that its opinion and the financial statements would be used for this purpose.Which of the following statements is correct with regard to a suit against Larson and the client by a purchaser of the securities under section 11 of the Securities Act of 1933?

A) The purchaser must prove that Larson failed to conduct the audit in accordance with generally accepted auditing standards.
B) The purchaser must prove that Larson knew of the material misstatements.
C) Larson will not be liable if it had reasonable grounds to believe the financial statements were accurate.
D) Larson will not be liable if the purchaser did not rely on the financial statements.

Question 45

Which of the following statements about the Securities Act of 1933 is not true?

A) The plaintiff must prove damages or an economic loss.
B) The plaintiffs must prove they read and relied upon the financial statements.
C) Any purchaser of securities may sue auditors.
D) The plaintiffs need not prove that the materially misstated financial statements are the direct cause of the loss.

Question 46

Which of the following is not part of the definition of proportionate liability adopted by the Private Securities Litigation Reform Act?

A) The total responsibility for loss is divided among all parties responsible for the loss.
B) Defendants who knowingly committed a violation of securities laws remain jointly and severally liable.
C) The full amount of damages may be recovered from any defendants involved in the action.
D) A solvent defendant's liability may be increased by 50 percent if other defendants are insolvent.

Question 47

Which of the following factorswould not influence third parties' abilities to bring suit against auditors for ordinary negligence under common law?

A) The extent to which the third party relied upon the misstated financial statements and this reliance resulted in their loss.
B) The nature of the activity by the auditors that resulted in their failure to exercise appropriate levels of professional care.
C) The relationship between the auditors and a third party.
D) The jurisdiction in which the action occurred.

Question 48

Typical defenses for auditors in common law actions include all of the following except

A) The plaintiff was foreseen.
B) The plaintiff contributed to the failure to detect material misstatements.
C) The financial statements were not materially misstated.
D) The audit was conducted in accordance with generally accepted auditing standards.

Question 49

Under the liability provisions of section 11 of the Securities Act of 1933,auditors may be liable to any purchaser of securities for certifying materially misstated financial statements that are included in the registration statement.Under section 11,which of the following must a purchaser of the security prove?

A) Reliance on financial statements, yes; fraud by auditors, yes.
B) Reliance on financial statements, yes; fraud by auditors, no.
C) Reliance on financial statements, no; fraud by auditors, yes.
D) Reliance on financial statements, no; fraud by auditors, no.

Question 50

A.Paula performed the audit of the financial statements of Abdul Company (a nonpublic entity currently not subject to filing requirements under the Securities Act of 1933 or Securities Exchange Act of 1934).Abdul is currently considering several alternatives for raising capital,including seeking financing from area banks or an initial public offering of its securities.Which of the following parties would have the lowest likelihood of successfully bringing suit for ordinary negligence against Paula?

A) Abdul Company.
B) Purchasers of Abdul's securities in an initial public offering.
C) First State Bank, a bank with which Abdul has not previously done business.
D) Simon Whitaker, a private investor who is considering acquiring Abdul.

Question 51

The Securities Act of 1933

A) Regulates trading in securities.
B) Approves and guarantees investments.
C) Regulates the initial issuance of securities.
D) Regulates the accounting profession.

Question 52

The first significant case under section 11 of the Securities Act of 1933 charging auditors with not conducting a reasonable investigation was

A) Rusch Factors v. Levin.
B) United States v. Benjamin.
C) Escott v. BarChris Construction Corp.
D) Ernst & Ernst v. Hochfelder.

Question 53

While conducting an audit,Larson Associates,CPAs,failed to detect material misstatements included in its client's financial statements.Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client.Larson knew that its opinion and the financial statements would be used for this purpose.In a suit by a purchaser against Larson,its best defense would be that the

A) Audit was conducted in accordance with generally accepted auditing standards.
B) Client was aware of the misstatements.
C) Purchaser was not in privity of contract with Larson.
D) Larson did not know the identity of the purchaser at the time of the audit.

Question 54

Foreseeable third parties are best described as

A) Management of the entity.
B) Those third parties that have a direct relationship with auditors through previous contract related to the audit engagement.
C) Those third parties who will rely on the audit and are specifically known by auditors.
D) Those third parties whose decisions normally rely on audited financial statements and opinions on those financial statements.

Question 55

According to Sarbanes-Oxley,accountants performing an audit or review must maintain all engagement documentation for a period of

A) 2 years.
B) 3 years.
C) 5 years.
D) 7 years.

Question 56

While conducting an audit of a public entity,Wallace failed to identify material misstatements in its client's financial statements.Investors then sued Wallace in connection with this audit.Which of the following would not need to be demonstrated in order for the shareholders to successfully bring suit against Wallace?

A) Wallace was in privity with the shareholders.
B) The shareholders relied upon the materially misstated financial statements.
C) Wallace acted with gross negligence in the audit.
D) The reliance on the materially misstated financial statements caused the shareholders' losses.

Question 57

The restatement of torts is a general legal doctrine that extends liability for ordinary negligence to

A) Foreseeable third parties.
B) Foreseen third parties.
C) Primary beneficiaries.
D) All users of financial statements.

Question 58

In a common law action against auditors,lack of privity is a viable defense if the plaintiff

A) Is the client's creditor who sues auditors for ordinary negligence.
B) Can prove auditors' gross negligence that amounts to a reckless disregard for the truth.
C) Is the auditors' client.
D) Bases the action upon fraud.

Question 59

The SEC Rule 10b-5 deals with

A) Fraud in the purchase or sale of securities.
B) Penalties for willfully and knowingly violating the Securities Exchange Act of 1934.
C) The use of the "due diligence" defense to avoid liability.
D) Integrated disclosure system for annual reports.

Question 60

Under the liability provisions of section 11 of the Securities Act of 1933,auditors may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the registration statement.Under section 11,auditors usually are not liable to the purchaser

A) If they can show contributory negligence on the part of the purchaser.
B) If they can demonstrate due diligence.
C) Unless the purchaser can prove privity with the auditors.
D) Unless the purchaser can prove scienter on the part of the auditors.

Question 61

How does the Securities Act of 1933,which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement,expand auditors' liability to purchasers of securities beyond that of common law?

A) Purchasers have to prove only loss caused by reliance on audited financial statements.
B) Privity with purchasers is not a necessary element of proof.
C) Purchasers have to prove either fraud or gross negligence as a basis for recovery.
D) Auditors are held to a standard of care described as professional skepticism.

Question 62

A lack of reasonable care that may be characterized by the failure of auditors to follow GAAS in the conduct of the audit is known as

A) Constructive fraud.
B) Fraud.
C) Gross negligence.
D) Ordinary negligence.

Question 63

Under the antifraud provisions of section 10(b)of the Securities Exchange Act of 1934,auditors may be liable if they acted

A) With ordinary negligence.
B) With independence.
C) Without due diligence.
D) Without good faith.

Question 64

Which of the following is the best defense that auditors can assert in a suit for common law fraud based on their unqualified opinion on materially misstated financial statements?

A) Contributory negligence on the part of the client.
B) A disclaimer contained in the engagement letter.
C) Lack of privity.
D) Lack of scienter.

Question 65

When accountants agree to perform a compilation or review of unaudited financial statements,the best way to avoid clients misunderstanding the nature of the work is to describe it completely in

A) An engagement letter.
B) The auditors' opinion.
C) A report to the clients' board of directors at the close of the engagement.
D) A management letter to the board of directors' audit committee.

Question 66

From the auditors' point of view,which of the following is a preferable provision for imposition of civil liability in a lawsuit for financial damages?

A) Joint and several liability.
B) Reasonably foreseeable users' approach to privity.
C) Foreseen third parties' approach to privity.
D) Proportionate liability.

Question 67

Which of the following is not a reason that the Class Action Fairness Act of 2005 will benefit auditors in class action lawsuits?

A) Federal courts provide a higher level of scrutiny for class action lawsuits than state courts.
B) Federal courts have more resources at their disposal for managing class action lawsuits.
C) State courts may discriminate against defendants from other jurisdictions.
D) Verdicts in state courts are normally more appropriate to apply to multiple jurisdictions than verdicts in federal courts.

Question 68

Under the Securities Act of 1933,which of the following defenses is related to auditors' performing a reasonable investigation of the financial statements?

A) Causation.
B) Contributory negligence.
C) Due diligence.
D) Prudent auditor.

Question 69

When creditors who relied on an entity's audited financial statements suffer monetary losses after a customer (the auditors' client)goes bankrupt,what must the plaintiff creditors in a lawsuit for damages show in a court that follows the doctrine in Credit Alliance?

A) The auditors knew and specifically acknowledged identification of the creditors.
B) The auditors could reasonably foresee them as beneficiaries of the audit because entities such as this client use financial statements to obtain credit from vendors.
C) The plaintiffs were foreseen users of the audited financial statements because they were vendors of long standing.
D) All of the above.

Question 70

Which of the following is not a valid defense for auditors' liability to third parties for ordinary negligence under common law?

A) The loss was caused by factors other than the materially misstated financial statements.
B) The third parties lack the proper standing (relationship) to bring suit in that jurisdiction.
C) The third parties lack a privity relationship with auditors.
D) The third parties did not rely upon the financial statements.

Question 71

Suppose that the auditors in the preceding question participated knowingly in commission of violations of securities laws (with managers and directors of the audit client).What is the auditors' likely obligation?

A) $5,000,000.
B) Zero.
C) $2,250,000.
D) $1,500,000.

Question 72

Individuals who believe they relied on misstated financial statements to make a decision and have suffered losses as a result will issue an action known as a

A) Breach of contract.
B) Tort.
C) Securities litigation.
D) Constructive fraud.

Question 73

Entities desiring to issue equity or debt must provide a set of financial statements to any prospective purchaser.This set of financial statements and other information for prospective purchasers is known as a

A) Prospectus.
B) Review.
C) Patron's acquisition statement.
D) Projected audited financial information.

Question 74

Users of financial statements have a different perception concerning the nature of auditors' services than the actual objectives of an audit.This difference is known as

A) Diverse liability perception.
B) Reasonable foreseeable third parties.
C) Insurance hypothesis.
D) Expectations gap.

Question 75

Sun Corp.approved a merger plan with Cord Corp.Among the determining factors in approving the merger was Cord's financial statements audited by Frank & Co.,CPAs.Sun had engaged Frank to audit Cord's financial statements.While performing the audit,Frank failed to discover certain irregularities that later caused Sun to suffer substantial losses.For Frank to be liable under common law liability,Sun at a minimum must prove that Frank

A) Knew of the irregularities.
B) Failed to exercise the appropriate level of professional care.
C) Demonstrated gross negligence.
D) Acted with scienter.

Question 76

Assume that auditors lost a civil lawsuit for damages and the court found total losses of $5 million.If the auditors were determined to be 30 percent at fault and were the only solvent defendant,what is the auditors' likely obligation under proportionate liability?

A) $ 5,000,000.
B) Zero.
C) $2,250,000.
D) $1,500,000.

Question 77

To be successful in a civil action under section 11 of the Securities Act of 1933 against auditors for liability for a materially misstated registration statement,the plaintiff must prove the

A) Auditors' intent to deceive, yes; plaintiff's reliance on the registration statement, yes.
B) Auditors' intent to deceive, yes; plaintiff's reliance on the registration statement, no.
C) Auditors' intent to deceive, no; plaintiff's reliance on the registration statement, yes.
D) Auditors' intent to deceive, no; plaintiff's reliance on the registration statement, no.

Question 78

When a client sues an accountant for failure to perform consulting work properly,the accountants' best defense is probably based on the doctrine of

A) Lack of privity of contract.
B) Contributory negligence on the part of the client.
C) Lack of any measurable dollar amount of damages.
D) No negligence on the part of the consultant.

Question 79

The Securities Act of 1933 and Securities Exchange Act of 1934 contain

A) Civil liability provisions applicable to auditors.
B) Criminal liability provisions applicable to auditors.
C) Neither a nor b.
D) Both a and b.

Question 80

Which of the following elements,if present,would support a finding of constructive fraud on the part of auditors?

A) Gross negligence in conducting the engagement.
B) Ordinary negligence in conducting the engagement.
C) Failure to perform the engagement in accordance with the terms in the engagement letter.
D) Actions that demonstrated scienter.