Watchdog LLP, a firm of registered auditors, was the auditor of Morell plc.

Watchdog LLP, a firm of registered auditors, was the auditor of Morell plc. Morell plc published an unaudited interim financial statement in mid-October 2011. Shortly after that, Jabez plc made a take-over bid for Morell plc valuing it at £350m. The bid was initially rejected by Morell plc’s board of directors on the grounds that it was too low. To support that view, on November 5, 2011, Morell plc issued a forecast showing a 50 per cent increase in profits before tax for the year ended March 31, 2012. This document included a letter from Watchdog LLP stating that the forecast had been properly compiled in accordance with the company’s stated accounting policies and a letter from Morell’s investment bank, Podmore & Co., asserting that the forecast had been made after due and careful inquiry. As a result, Jabez increased its bid to £400m. and completed the take-over in mid-December 2011.

In January 2012, the directors of Jabez plc realised that they had made a bad investment. Morell plc was now reckoned to be worthless. In February 2012, Jabez plc began a legal action against Watchdog LLP, Podmore & Co. and Morell’s directors. The law suit seeks to recover £400m purchase price plus damages and legal costs. In total the claim is for £500m. Watchdog LLP has insurance cover of £250m.

The suit alleges that Watchdog LLP, Podmore & Co. and Morell’s directors made or allowed to be made misrepresentations in:
• the audited financial statements for the year ended March 31, 2011, on which the auditors’ opinion was unqualified;
• in the unaudited interim statement published in mid-October 2011,
• and in defence documents issued to shareholders in October and November 2011.

Jabez plc claims that:
• It was owed a duty of care by Watchdog LLP, Podmore & Co. and Morell’s directors;
• Its reliance on the various documents was reasonably foreseeable;
• It did in fact place reliance on the documents; and,
• Its investment loss was a direct consequence of its reliance on the misleading documents

Draft a report outlining how you would advise the auditors Watchdog LLP to defend the lawsuit, identifying the potential arguments likely to be made against them and setting out rebuttal of these arguments.

. cite legal precedents

 
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