International Auditing Standards - Essay Example

The second of the above, however, cannot be established since the available evidence makes it apparent that the omission or misstatement of material facts was not deliberate. SEC recognizes misrepresentation as an offense (Miller et al., 2008, 572).

In suing Mitchell & Moss and demanding recovery, those who purchased the Whitlow & Company shares of stock would base their argument on negligence on the part of the former and its major deviations from the stipulated norms of auditing and due diligence standards. They are further required to provide evidence that (i) they were third-party beneficiaries in the contract between Mitchell & Moss and Whitlow & Company and (ii) Mitchell & Moss is legally obliged to act without negligence in the audit of the Whitlow & Company. There certainly were instances in which such claims by a third party found favor, the conventional view is that it is iniquitous to implicate auditors with unlimited liability on a charge of negligence. The present case is broadly within the scope of the latter view.

Section 11 of the Securities Act of 1933 imposes civil liability on accountants for misstatements and omissions of material facts (Miller et al., 2008,650). Based on this, Jackson asserts that she suffered a loss by relying upon the financial statements, prepared and certified by Mitchell & Moss, which were misleading. This claim for recovery of damage, however, is valid only if she succeeds in establishing that the untruth or omission was not known to her at the time of purchasing the Whitlow & Company shares of stock.

Jackson’s is a case of potential liability in the plaintiff’s favor in which it becomes entirely the defendant’s responsibility to explain why he should not be held liable. One option available for Mitchell & Moss is to argue that the alleged omission or untruth could, in all likeliness, be deemed to be known to Jackson, she is a member of the Private Placement Group having access to and sound knowledge of the kind of information to be found in a registration statement. The provision dealing with misstatements and omissions of material facts takes into account the level of awareness of the lay investor. Jackson’s knowledge level is not comparable to that of the lay investor. Another option is to extend the argument that the alleged violation (of Section 11(a) of the Securities Act of 1933) is too inconsequential for the defendant to be held liable. These two options apart, the defendant may challenge (as asserted by Allen, Dunn, and Rose) the stand that attributes the fall in the stock prices to the alleged omission or untruth in the financial statements. They may contend that the general decline in the stock market accounts for the losses incurred by the customers and shareholders of Whitley & Company.