Cengage Advantage Books: Introduction to Business Law 4th Edition by Timothy Koch, Jeffrey Beatty, Jeffrey Beatty, Susan Samuelson, Susan Samuelson

Exercise 7

James and Penelope Monroe purchased securities offered by Hughes Homes, Inc., a retailer of manufactured housing in Tacoma, Washington. During its audit, Deloitte Touche found that Hughes Homes' internal controls had flaws. As a result, the accounting firm adjusted the scope of its audit to perform independent testing to verify the accuracy of the company's financial records. Satisfied that the internal controls were functional, Deloitte issued a clean opinion. After Hughes Homes went bankrupt, the Monroes sued Deloitte for violating the 1933 Act. They alleged that Deloitte's failure to disclose that it had found flaws in Hughes's internal control system was a material omission. GAAS did not require disclosure. Is Deloitte liable