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

question 18

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 claims that he should not be liable because he relied on the accounting firms' expertise with regard to the registration statements. Is Wallace correct?

• A) Yes, directors are not required to perform a due diligence inquiry if another expert compiles the statement.
• B) Yes, reliance is a valid defense where a director is involved.
• C) Yes, but only if the accounting firm performed a due diligence inquiry.
• D) No, because he is a director.
• E) No, as a director, Wallace cannot use a defense of reliance because he was aware of questionable issues in the statements.

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Definitions:

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