quality:corruption, linguistic:voice_change
United States

The Securities Act of 1933 requires a company to register with the Securities and Exchange Commission (SEC). In order to complete registration, the company must include audited financial statements and numerous other disclosures. If the registration statement was to be found materially misstated, both the company and its auditors may be held liable. Those who initially purchase a security offered for sale are the only ones protected by the 1933 Act. These security purchasers, known as the plaintiffs, only need to prove a loss was constant and that the registration statement was misleading. They do not need to prove that they relied upon the registration or that the auditors were negligent. In order for an auditor to avoid liability, they must provide proof that the audit was performed with due diligence, the plaintiff’s losses were not caused by misstated financial statements, the plaintiffs knew of the misstatement at the time the securities were purchased, or the statute of limitations had expired (one year after the discovery of the misstatement, but no more than three years after the security was offered to the public). The due diligence defense is the defense that most auditors raise, even though it is difficult for auditors to prove their innocence. The standing precedent on interpretation of due diligence is Escott v. BarChris Construction Corporation, decided in 1968.