Common Law Liability to Third Parties. Flacco, CPA, conducted the audit of RavenCompany and issued an unmodified opinion that concluded that the financial statementspresented its financial condition, results of operations, and cash flows according to GAAP.As part of the preaudit conference, Flacco was informed by Raven’s management that itsaudited financial statements would be presented to Baltimore National Bank to securefinancing for a significant expansion opportunity.Using these financial statements, as well as Flacco’s opinion on those statements, Ravenobtained financing from the following parties: (1) Baltimore National Bank, (2) RegionalState Bank, and (3) Maryland Equity Partners (a private equity firm). Each of these partiesspecifically requested audited financial statements and relied on these statements in providing financing to Raven. Six months after obtaining financing, Raven’s financial conditionworsened, and it declared bankruptcy, forcing Raven to default on its payments to BaltimoreNational Bank and Regional State Bank. In addition, Maryland Equity Partners’ investmentin Raven became worthless.After the bankruptcy, the parties that had provided financing to Raven determined thatRaven had intentionally misstated its financial statements by recording fictitious revenuesand accounts receivable. These parties decided to file suit against Flacco for failure to identify the fictitious revenues and accounts receivable. Required:a. Define the following type of third parties: (1) primary beneficiary, (2) foreseen third parties,and (3) foreseeable third parties.b. Considering the three types of third parties identified in (a), how would you classify(1) Baltimore National Bank, (2) Regional State Bank, and (3) Maryland Equity Partners?c. Assume that court proceedings concluded that Flacco’s work failed to comply with generally accepted auditing standards but that Flacco was neither aware of the misstatementsnor grossly negligent in his performance. Which of the parties would be likely to prevailin its claim against Flacco?d. Assume that court proceedings concluded that Flacco failed to send confirmations toRaven’s customers and simply mathematically verified the summary listing of accountsreceivable provided to him by Raven. Which of the parties would be likely to prevail inits claim against Flacco?
Common Law Liability to Third Parties. Flacco, CPA, conducted the audit of Raven
Company and issued an unmodified opinion that concluded that the financial statements
presented its financial condition, results of operations, and cash flows according to GAAP.
As part of the preaudit conference, Flacco was informed by Raven’s management that its
audited financial statements would be presented to Baltimore National Bank to secure
financing for a significant expansion opportunity.
Using these financial statements, as well as Flacco’s opinion on those statements, Raven
obtained financing from the following parties: (1) Baltimore National Bank, (2) Regional
State Bank, and (3) Maryland Equity Partners (a private equity firm). Each of these parties
specifically requested audited financial statements and relied on these statements in providing financing to Raven. Six months after obtaining financing, Raven’s financial condition
worsened, and it declared bankruptcy, forcing Raven to default on its payments to Baltimore
National Bank and Regional State Bank. In addition, Maryland Equity Partners’ investment
in Raven became worthless.
After the bankruptcy, the parties that had provided financing to Raven determined that
Raven had intentionally misstated its financial statements by recording fictitious revenues
and
Required:
a. Define the following type of third parties: (1) primary beneficiary, (2) foreseen third parties,
and (3) foreseeable third parties.
b. Considering the three types of third parties identified in (a), how would you classify
(1) Baltimore National Bank, (2) Regional State Bank, and (3) Maryland Equity Partners?
c. Assume that court proceedings concluded that Flacco’s work failed to comply with generally accepted auditing standards but that Flacco was neither aware of the misstatements
nor grossly negligent in his performance. Which of the parties would be likely to prevail
in its claim against Flacco?
d. Assume that court proceedings concluded that Flacco failed to send confirmations to
Raven’s customers and simply mathematically verified the summary listing of accounts
receivable provided to him by Raven. Which of the parties would be likely to prevail in
its claim against Flacco?
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