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Conan Doyle & Associates (CD&A), CPAs, served as the auditors for Lestrad Corporation and Watson Corporation, publicly held companies traded on MASDAO. Watson recently acquired Lestrad Corporation in a merger that involved swapping 1.75 shares oi' Watson For I share of Lestrad. In connection with that merger, CD&A issued an unqualified report on the financial statements and participated in the preparation of the pro forma unaudited financial statements contained in the com¬bined prospectus and proxy statement circulated to obtain shareholder approval of the merger and to register the shares to be issued in connec¬tion with the merger. Watson prepared a Form 8K and Form 10K in con¬nection with the merger. Shortly thereafter, financial disaster beset the merged company, resulting in large losses to the shareholders and credi¬tors. A class action suit on behalf of shareholders and creditors has been hied against Watson and its management. In addition, it names CD&A as a codefendant, challenging the fairness, accuracy, and truthfulness of the financial statements.
Required:
Discuss the various bases of CD&A's potential civil liability to the share¬holders and creditors of Watson as a result of issuing an unqualified report on the audited financial statements of Watson and Lestrad and having participated in preparing the unaudited financial statements re¬quired in connection with the merger under
a. State common law.
b. The federal securities acts.

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Conan Doyle & Associates (CD&A), CPAs, served as the auditors for Lestrad Corporation and Watson Corporation, publicly held companies traded on MASDAO. Watson recently acquired Lestrad Corporation in a merger that involved swapping 1.75 shares oi' Watson For I share of Lestrad. In connection with that merger, CD&A issued an unqualified report on the financial statements and participated in the preparation of the pro forma unaudited financial statements contained in the com¬bined prospectus and proxy statement circulated to obtain shareholder approval of the merger and to register the shares to be issued in connec¬tion with the merger. Watson prepared a Form 8K and Form 10K in con¬nection with the merger. Shortly thereafter, financial disaster beset the merged company, resulting in large losses to the shareholders and credi¬tors. A class action suit on behalf of shareholders and creditors has been filed against Watson and its management. In addition, it names CD&A as a codefendant, challenging the fairness, accuracy, and truthfulness of the financial statements.
Required:
Discuss the various bases of CD&A's potential civil liability to the share¬holders and creditors of Watson as a result of issuing an unqualified report on the audited financial statements of Watson and Lestrad and having participated in preparing the unaudited financial statements re¬quired in connection with the merger under
a. State common law.
Since the CPA firm is involved in two types of acts, namely the issuing of an unqualified report and second being involved in the preparation of the un-audited financial statements of the firm, there are common law liabilities that have developed through case decisions. These ...

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Hatim Baxamusa, MBA
Education
  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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