Case Problem:
The Todman & Co. accounting firm audited the financial statements of Direct Brokerage, Inc. (DBI), from 1999 through 2002. Each year Todman issued an unqualified opinion that DBI’s financial statements accurately portrayed DBI’s finances. In fact, DBI failed to pay its payroll taxes for 1999 or 2000, a fact that came to light in 2003. After DBI collapsed in 2004, investors sued Todman, alleging that Todman was aware of DBI’s undisclosed liability and its need for an infusion of capital but failed to correct or withdraw its 2002 certified opinion or to advise DBI to withdraw its financial statements. The plaintiffs identified five red flags:
• In 1998, a Todman auditor noted a “large payroll tax payable at the end of the year”necessitating further analysis, but no analysis was ever done.
• Todman did not investigate DBI’s failure to pay any payroll tax after June 1998.
• Todman knew that DBI’s payroll taxes dropped from $248,899 to zero between 1998 and 1999, but never investigated.
• Todman knew that DBI’s employee compensation rose significantly in 1999 while its payroll taxes plunged, but did not investigate.
• That trend continued in 2000, and Todman knew it but did not investigate. Did Todman violate Section 10(b) or Rule 10b-5?
Your answer must be, typed, double-spaced, Times New Roman font (size 12), one-inch margins on all sides, APA format and also include references.