Ocean and Associates, CPAs, audited the financial statements of Drain Corporation. As a result of Ocean's negligence in conducting the audit, a material misstatement in the financial statements went undetected. Ocean was unaware of this fact. The financial statements and Ocean's unqualified opinion were included in a registration statement and prospectus for an initial public offering of stock by Drain. Sharp purchased shares in the offering. Sharp received a copy of the prospectus prior to the purchase but did not read it. The shares declined in value as a result of the misstatements in Drain's financial statements becoming known. Under which of the following acts is Sharp most likely to prevail in a lawsuit against Ocean?

Question

Quizplus · Accepted Answer

The Securities Act of 1933 imposes liability on accountants who include false or misleading information in the registration statement or prospectus upon which an investor relies when purchasing securities. In this case, Sharp purchased shares in the offering, and the financial statements and Ocean's unqualified opinion were included in the registration statement and prospectus. Therefore, if Ocean negligently audited the financial statements and a material misstatement went undetected, and if Sharp suffered losses as a result, Sharp may prevail in a lawsuit against Ocean under the Securities Act of 1933. The Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002 would not be applicable in this case, as they deal with other aspects of securities regulation, such as reporting requirements and insider trading. Additionally, the fact that Sharp did not read the prospectus does not necessarily bar her from recovery under the Securities Act of 1933, as long as she can show that the misstatements were material and that she relied on the prospectus when making her investment decision.

Ocean and Associates, CPAs, Audited the Financial Statements of Drain