University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

403

Pages:

2
Author:

bratrochanter

In the case of Escott v. BarChris Construction Corp., the court examined the liability of individuals under Section 11 of the Securities Act of 1933 due to material misstatements and omissions in BarChris's registration statement for debenture issuance. Key defendants—Trilling (BarChris’s controller), Auslander (a newly appointed outside director), and Peat, Marwick (auditors)—failed to meet the due diligence standard necessary to avoid liability. Here are the main findings: 1. Trilling’s Liability   Role and Responsibility: Trilling, as BarChris’s controller, was deemed a minor player within the company but signed the registration statement. He claimed to be unaware of many inaccuracies, yet he knew of some falsehoods, such as misstatements about cash on deposit and contingent liabilities on lease transactions. Due Diligence Defense: Trilling failed to conduct an adequate investigation. His assumption that others would ensure accuracy was insufficient, especially as a signatory of the registration statement. The court held that he could not avoid responsibility merely by relying on others. 2. Auslander’s Liability   Background and Actions Taken: Auslander was an outside director and newly appointed to BarChris’s board. He conducted a preliminary investigation of BarChris, including obtaining general credit information, but did not thoroughly examine the registration statement before signing it. Due Diligence Defense: Auslander wrongly believed that Peat, Marwick was responsible for all figures, which he could have discerned by carefully reading the prospectus. His reliance on generalized inquiries and statements from company officers (Vitolo and Russo) was inadequate. The court found that a prudent director would seek specific facts rather than rely solely on generalized assurances, and Auslander’s minimal investigation did not meet the statutory standard. 3. Peat, Marwick’s Liability as Experts  Peat, Marwick, as auditors and experts on financial statements, were liable for inaccuracies in the audited sections of the registration statement, particularly in financial reporting. Their responsibility under Section 11 was to ensure the accuracy of these sections, and they were expected to comply with generally accepted auditing standards (GAAS). Implications of the Ruling  Due Diligence Requirements: Section 11 requires that directors, officers, and auditors thoroughly investigate the accuracy of registration statements. Signatories must not rely on vague assurances or partial information but  must conduct a detailed and relevant inquiry, especially on non-expertised portions for directors. Liability of New Directors: Even newly appointed directors, like Auslander, bear full responsibility for due diligence under Section 11, emphasizing that they cannot bypass their investigatory obligations due to their recent association with the company. The court’s ruling reinforced that Section 11 intends to protect investors by holding corporate insiders accountable for ensuring the truthfulness and accuracy of registration statements, demanding thorough oversight and validation of provided information.