[BigCom Securities] A&Z and DCB, Two Large Accounting Firms, Prepared

question 60

Multiple Choice

[BigCom Securities] A&Z and DCB, two large accounting firms, prepared registration statements for BigCom, a large, public company, and provided information on BigCom to the SEC. A&Z's statements contained several misrepresentations about BigCom's securities. Wallace, BigCom's Chairman of the Board of Directors, signed the statements prior to the SEC filing. As is the usual procedure, Wallace signed the statements but did not read them carefully. He heard there were some questionable issues about the quality of the statements, but he felt confident with the expertise of the large accounting firms. Subsequently, purchasers of BigCom claimed there were misrepresentations about BigCom's shares in the statements filed with the SEC and sued A&Z, DCB, and Wallace. All three defendants deny liability.
-Wallace was also charged under Section 15 of the Securities Act. He asserted an affirmative defense claiming he is not liable as he is not a "controlling person" under that statute. Is he correct?

• A) No, because members of a board of directors can only be considered "controlling persons" if they had responsibility for due diligence.
• B) No, as chairman of the board of directors, he is a "controlling person".
• C) Yes, because he is not an accountant or other financial expert.
• D) Yes, even though he was chairman of the board, he did not control the content of the registration statements.
• E) Yes, if he did not have ultimate responsibility to conduct due diligence.

---

Definitions:

Absorption Costing

Absorption costing is an accounting method that includes all manufacturing costs (direct materials, direct labor, and both variable and fixed manufacturing overhead) in the cost of a product.

Absorption Costing

An accounting method that includes all manufacturing costs (both variable and fixed) in the cost of a product.

Unit Product Cost

The calculated cost associated with producing a single unit of product, including direct materials, labor, and overhead.

Absorption Costing

An accounting practice where the cost of a product is calculated by including all expenses from manufacturing, like direct materials, direct labor, and both variable and fixed overheads.