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Research Case 2:
Fifteen years ago, Becky Welch and Ann Dye formed a CPA firm, Welch and Dye, as a limited liability partnership. Now, Welch and Dye, LLP has five partners and more than 25 managers and accounting staff. Partner Pend joined the firm five years ago from another local CPA firm. He was solely in charge of auditing Promdita Technology for the past four years. Promdita Technology is a non-accelerated corporation and was growing so rapidly during the past three years. To sustain the high growth level, Promdita technology was involved in very aggressive earnings management activities and created many special purposes entities. By the end of summer 2004, Promdita was collapsed and share prices decreased from $70.56 to just pennies. The investigation revealed that Promdita reported financial condition was sustained by institutionalized, systematic, and creatively planned accounting fraud. Promdita filed for bankruptcy in the Southern District of New York in summer 2004. Although partner Pend was solely involved in the audit of Promdita, Shareholders sued the five partners in the firm. In fact, the lawsuit named the entire practice as a defendant.
Required:
1. What liability do the other four partners in this CPA have in connection with this lawsuit?
2. What factors will be important in determining the exact liability (if any) of these four Partners?
Note: Please clearly cite any articles or resources you will use to answer this question. Your answer should not exceed one page.
Expert Answer
1. All the partners are equally liable in connection with the lawsuit filed. They all will have to bear the litigation and penalty in the ratio of their profit and loss shareing in the firm, unless otherwise defiend in the LLP agreement.
2. The maximum liability(if any) will be to extent of there capital in the firm, i.e., they cant be asked to bring additional capital to pay the liablity. It is worth noting that any partner who have made significant profits due to the involvement in the fraud may be asked to bring in additional capital to pay the penalty.
