Reference no: EM131390714
The accounting firm of T, W & S was engaged to perform an audit of Progate Manufacturing Company.
During the course of its investigation, T, W & S discovered that the company had overvalued its inventory by carrying the inventory on the books at the previous year's prices, which were significantly higher than current prices. When T, W & S approached Progate's president, Lehman, about the improper valuation of inventory, Lehman became enraged and told T, W & S that unless the firm accepted the valuation, Progate would sue T, W & S.
Although T, W & S knew that Progate's suit was frivolous and unfounded, it wished to avoid the negative publicity that would arise from any suit brought against it. Therefore, on the assumption that the overvaluation would not harm anybody, T, W & S accepted Progate's inflated valuation of inventory.
Progate subsequently went bankrupt, and T, W & S is now being sued by
(1) First National Bank, a bank that relied upon T, W & S's statement to loan money to Progate, and
(2) Thomas, an investor who purchased 20 percent of Progate's stock after receiving T, W & S's statement.
What are the rights and liabilities of First National Bank, Thomas, and T, W & S?
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