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

Quizplus · Accepted Answer

To establish a claim based on Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, a plaintiff must prove that the defendant acted with scienter, which means that the defendant had knowledge of the misrepresentations or acted with reckless disregard for the truth. In this case, West was not aware of the misrepresentations and was not negligent in performing the audit, so there is no evidence of scienter. Therefore, West is likely to prevail in any lawsuit brought by Reed. The fact that Reed relied upon the financial statements is not sufficient to establish liability under Section 10(b) and Rule 10b-5. Privity of contract is also not required for liability under these provisions.

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