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CPA REG > R5 BLAW > Flashcards

R5 BLAW Flashcards

1
Q

CPA Legal Liability

A

can arise from:

  1. Breach of Contract
  2. Tort (negligence, fraud, or constructive fraud)
  3. Violation of Statute (33 and 34)
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2
Q

Breach of Contract

A

If CPA doesn’t fulfill terms of engagement

  • generally requires privity (client and named 3rd parties)
  • if CPA breach is material, not entitled to payment
  • defenses mentioned in contract apply
    (e. g. client’s failure to let CPA see acct records if failure to cooperate and valid)
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3
Q

Ordinary Negligence

Tort

A
  • must show: duty of care, breach, caused injury, and damages
  • majority rule: duty to client and limited forseeable class of persons whom CPA knows will rely on work
  • minority ultramares decision: duty to privity so clients and named third party beneficiaries
  • defense: neither client nor person who CPA knows will rely on audit (gen public/creditors) NO PRIVITY

Breach- failure to act w due care (ordinary negligence)

  • perform w skill and care expected of ordinarily prudent CPAs under the circumstances
  • defense: due diligence, followed GAAS or GAAP
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4
Q

Fraud and Constructive Fraud

Tort

A

Actual Fraud MAIDS

  • misrepresentation of material fact
  • actual reliance on misrepresentation
  • intent to induce reliance
  • damages
  • scienter: intent to deceive

Constructive Fraud/Gross Negligence
- MAIDS but instead of scienter, reckless

CPA can be liable to anyone

  • privity is not a defense to fraud
  • best defense: lack of scienter (had good faith)
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5
Q

Securities Laws

A

Section 11 of 1933 Act
Rule 10b-5 of 1934 Act
Private Securities Litigation Reform Act
Sarbanes-Oxley Act

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6
Q

Section 11 of 1933 Act

A 
IPO "LAM"
CPA who signs on FSs in a registration statement can be held liable to a plantiff who "LAM"
- loss suffered
- acquired the stock
- material misrepresentation in FS

defense: due dilligence
no intent, negligence, or reliance required

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7
Q

Rule 10b-5 of 1934 Act

A

Fraud “MAIDS”
CPA can be held criminally or civilly liable if proven:
- loss suffered
- acquired the stock
- material misrepresentation (LAM same as section 11)
- scienter
- reliance on misrepresentation

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8
Q

Private Securities Litigation Reform Act

A

CPA has certain duties in an audit under 1934 Securities Exchange Act

Audit Requirements

  • designed to detect illegal acts
  • designed to identify related party transactions
  • evaluate the ability of issuer to continue as a going concern

Detection Procedure

  • if illegal acts found, inform issuer’s audit committee
  • if AC doesnt take action, report directly to board of directors

Notification to SEC

  • board is to report to SEC within 1 day
  • if CPA fails to receive copy of notice w/i 1 day, CPA is to furnish SEC w copy of report within 1 day
  • CPA may resign from the audit before notifying SEC

Not liable for breach of confidentiality

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9
Q

Sarbanes-Oxley Act

A

under SOX, it is a crime:

  • to knowingly alter, destroy, falsify, etc document to impede federal investigation,
  • not keep audit workpapers for 7 years
  • defraud
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10
Q

Audit Workpapers

A
  • workpapers belong to the accountant or accountant’s firm, not the client

prohibited from showing papers to anyone w/o client’s permission EXCEPT:

  • subpoenaed
  • shown to prospective purchaser of CPA’s practice as long as they don’t disclose confidential information (but not given)
  • CPA society voluntary quality control review
  • defense of a lawsuit
  • official investigation by AICPA/state trial board
  • GAAP/GAAS requires disclosure
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11
Q

Security Definition

A

If investor is passive, the investment is most likely a security

include: stocks, bonds, debentures, oil well interest, stock options, collateral trust certificates, warrants, and limited parternship interests
excluded: certificates of deposit and general partnership interests

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12
Q

Securities Act of 1933

A

regulates original issuance of securities (IPO)

purpose: provide investors w sufficient investment info
- requires most issuers to register new issues of securities w SEC and provide prospectuses containing material info regarding securities
- SEC doesn’t guarantee accuracy of this info, just evaluates completeness

Required to Register: Issuers, Underwriters, and Dealers

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13
Q

Registration Statement

Securities Act of 1933

A

most securities can’t be sold unless registered w SEC
Part 1- The Prospectus
- a written, radio, or television offer to sell securities
- summarizes info about securities
- each investor must receive a copy of the prospectus before or contemporaneous w every sale of security

Part 2- Info about securities being issued must include

  • Audited BS and profit and loss statement from a certified public accounting firm registered w PCAOB*
  • names and addresses of directors, officers, underwriters, and shareholders w >10%
  • amount of stock and debt issuer has outstanding
  • principal purpose offering proceeds will be used for
  • anything that might affect value of the securities

Shelf Registrations- just 1 registration statement for all securities they will offer in the future
- GR prohibited, but permitted if issuer has filed under 1934 act for a year and info is continuously updated

SEC reviews the registration statement to ensure completion of both parts

Effective 20 days after filing

Blue Sky Laws- state laws governing stock sales

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14
Q

Timetable of Sales Activity

Securities Act of 1933

A

30 days before Registration- No Sales Activity Allowed
- permitted to negotiate w an underwriter

After Registration but Before Effectiveness (20 days)- sales GR prohibited but these are allowed:

  • oral offers to sell (but no written)
  • tombstone ads
  • preliminary (red herring) prospectus

After Effective Date
- can be sold, all investors must receive a prospectus

Special Rules for Some 1934 Act Reporting Companies (large private company now going public)

  • seasoned issuers have reported under 1934 for >12 months and have been good
  • well-known seasoned issuers also have 700 million equity outstanding worldwide
  • WKSIs can make oral or written offers at any time and also have a special form of shelf registration effective immediately
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15
Q

Exemptions from Registration

Securities Act of 1933

A

1933 has 2 types of exemptions

  1. Securities Exemptions “BRINGS”
    - banks and savings and loans (CDs)
    - railroads/common carriers
    - insurance policies (not companies)
    - not for profit orgs
    - government
    - short term commercial paper (maturity date 9 months or less)
  2. Transaction Exemptions
    - non issuer, underwriter or dealer (casual sales)
    - exchanges w existing holders and corporate reorganizations
    - intrastate sales
    - private offering exemption- regulation D*
    - regulation A*
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16
Q

Regulation D

Securities Act of 1933

A

3 private offering exemptions, general conditions that apply:

  • prohibiting general advertising of securities sold under regulation D, but exceptions under 504 and 506
  • purchasers must hold for 2+ years
  • SEC must be informed w/i 15 days of first sale

Rule 504

  • 1 million limit in 12 month period
  • no limit on number or type of purchaser
  • no specific disclosures required

Rule 505

  • 5 million limit in 12 month
  • any number of accredited investors, but only 35 or less unaccredited
  • accredited: 1 million in net worth or 200,000 annual income
  • if only accredited purchase, no disclosure required
  • if any unaccredited investors, all investors must be given an annual report w audited financial statements

Rule 506

  • unlimited dollar amount
  • any # of accredited, but only 35 unaccredited, but sophisticated
  • if only accredited, no disclosure; if any unaccredited, annual report for all
17
Q

Regulation A- Simplified Filing

Securities Act of 1933

A
  • modified regulation often referred to as Reg A+
  • not a registration exemption, but rather a simplified form of registration to allow SMALL companies to make IPOs quicker and less cost
  • file an offering statement with a offering circular
  • companies may “test the waters” to determine interest

up to 5 mill

who can NOT use reg A? GAS

  • gas, oil, minerals
  • acquire or merge an unidentified company
  • SEC reporting companies
  • companies disqualified by SEC

2 Tiers Under Reg A

  1. Tier 1
    - up to 20 million
    - no investor limits
    - general solicitation allowed
    - financials don’t have to be audited
    - filing doesn’t have to be updated
  2. Tier 2
    - up to 50 million
    - unaccredited investors can’t invest >10% of their income
    - general solicitation allowed
    - financials must be audited
    - filing must be updated
18
Q

Liability Under 1933 Act

A

Section 11 - civil

  • “LAM”
  • need not prove intent to deceive, negligence, or reliance
  • anyone who signs a registration statement is liable, privity not required
  • defense: due diligence

Section 12- Civil Antifraud

  • if required registration was not made, if prospectus not given, or if materially false statements made or omitted
  • purchaser may sue for damage, no need for scienter or reliance

Section 17- Criminal Antifraud

  • anyone who uses fraud
  • enforced by SEC and prosecuted by Justice Department
19
Q

Securities Exchange Act of 1934

A
  • exchanges (sales and purchases) after securities are issued
  • registration and reporting provisions
  • antifraud provisions
20
Q

1934 Act Registration Requirements*

A

2 companies must register w SEC:

  1. shares traded on a national exchange or
  2. more than $10 million in assets and >2,000 shareholders or 500 non accredited shareholders
  • national stock exchanges, brokers and dealers must also register
21
Q

1934 Act Reporting Requirements

A

Companies Required to Report– Reporting Companies

  • all companies required to register under 1934 Act
  • any issuer that must register under 1933 Act

must file periodic business reports & 5% TIP

Periodic Business Reports- 10K, 10Q, 8K

  • 10K annually within 60 days (90 for large corps) from fiscal year end; must be certified by independent accts
  • 10Q quarterly filed w/i 40 days (45 for small); contain reviews of interim financial info by independent CPAs
  • 8K filed w/i 4 days after major change in company

5% TIP

  • 5%+ Owners Must Report: bg info about purchaser, source of funds, purpose in buying
  • Tender Offers: any party making tender off to purchase 5%+; report must include bg info
  • Insiders: officers, directors, >10% stockholders; disclose holdings in monthly updates; + absolute liability on insiders who make profits wi 6 month period
  • Proxy Solicitations and Statements: written request for permission to vote a shareholder’s shares at a shareholder meeting
  • more R5-54
22
Q

Rule 10b-5– Antifraud Provisions

1934 Act

A
  • Rule 10b applies even if registration not required
  • prohibits fraud in connection w purchase or sale of any security
  • LAM + scienter + reliance (MAIDS)
  • Interstate Commerce- thus federal laws apply
  • Insider Trading = Fraud
  • SEC can impose fines and seek criminal penalties, but does not prosecute themselves
23
Q

Section 18

1934 Act

A

liability for false or misleading information in the registration statement or other required reports (periodic business reports and 5%TIP)
-defense: lack of scienter

CPA REG (11 decks)

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