West & Company, CPAs, was engaged by Sand Corporation to audit its financial statements. West issued an unqualified opinion on Sand's financial statements. Sand has been accused of making negligent misrepresentations in the financial statements that Reed relied upon when purchasing Sand's stock. West was not aware of the misrepresentations and was not negligent in performing the audit. If Reed sues West for damages based on Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934, West will:

Question

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In order for Reed to prevail in a lawsuit under Section 10(b) and Rule 10b-5, Reed must prove that West had some degree of scienter, or intent to deceive, manipulate, or defraud. Since West was not aware of the misrepresentations and was not negligent in performing the audit, it is unlikely that Reed will be able to prove scienter. Therefore, West will likely prevail in this lawsuit. The fact that Reed relied upon the financial statements is not sufficient to establish liability under Section 10(b) and Rule 10b-5. The lack of privity between West and Reed is also not determinative of liability in this context.

West & Company, CPAs, Was Engaged by Sand Corporation to Audit