While auditing the financial statements of Forble Corp. (which are to be included in a Securities Act registration statement), Ernie, a certified public accountant, fails to review any of Forble's journal entries, does not read the details of meetings of the board of directors, and does not even speak with the comptroller of Forble. Consequently, Ernie does not discover that substantial loans, which went unmentioned in the financial statements, had been made to Forble officers. As a result, the registration statement omits any mention of the loans. Assuming the omitted fact is a material one and that Ernie is not an officer or director of Forble, does Ernie face potential liability under Section 11 of the Securities Act of 1933? Discuss the reasons for your answer.

Question

What will be an ideal response?

Answer 1

Yes. Section 11 of the 1933 Act provides civil liabilities for damages resulting to an investor who finds, after purchasing the security, that the registration statement for the security contained an untrue statement or omitted a material fact. Potentially liable for such misleading or false information in the registration statement are all of its signers, all directors (whether or not they signed), all "experts" who gave consent to be named in the registration statement as having prepared or certified part of it (such as auditors, lawyers, geologists, or engineers), and the underwriters of the distribution of the security. In this case, it makes no difference that Ernie is not an officer or director of Forble, because he certified information that went into the registration statement. As evident, Ernie also did not exercise due diligence in conducting his audit as he failed to check the journal and talk to the comptroller-actions which were not consistent with what a reasonable accountant would have done in the course of an audit. Therefore, he is a potential defendant under Section 11 of the 1933 Act.