In February, the U.S. Court of Appeals for the Second Circuit reversed a lower court decision and held a closely held corporation's auditor primarily liable under Sec. 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5.Specifically, in Overton v. Todman & Co. CPAs PC, the court held that an auditor may incur primary liability when the auditor makes a statement in its certified opinion that is false or misleading when made, subsequently learns or was reckless in not learning that the earlier statement was false or misleading, knows or should know that potential investors are relying on the opinion, and yet fails to take reasonable steps to correct or withdraw its opinion and/or the financial statements.
Given the paramount role that audits play for nearly every business in this country, the Overton decision could have broad consequences for all accountants and the businesses that they audit.
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