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MGMT 643 > Chapter 47 > Flashcards

Chapter 47 Flashcards

1
Q

What are the three areas of potential liability to clients?

A

Breach of contract, negligence, and fraud.

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2
Q

Breach of Contract

A

Accountants owe a duty to their clients to honor the terms of their contract and to perform the contract within the stated time period

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3
Q

What are the 4 elements of a standard negligence case?

A

Plaintiffs have to prove all 4:
1. Duty
2. Breach
3. Causation
4. Damages

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4
Q

Accountant’s Duty of Care

A
  1. GAAP and GAAS
  2. Discovering Improprieties
  3. Audits, Qualified Opinions and Disclaimers
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5
Q

Discovering Improprieties

A

as an accountant you aren’t required to find every problem – failure to discover doesn’t mean you are always negligent

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6
Q

Defenses to Negligence

A

Texas is a comparative state. Poke holes in the plaintiff’s proof. Proximate cause (about foreseeable cause).

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7
Q

3 elements of a fraud case:

A

Plaintiff has to prove:
1. Misrepresentation of material facts (concealment, etc.)
2. With intent to deceive (scienter)
3. Justifiable reliance by the Plaintiff (reasonable person)

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8
Q

Actual Fraud

A

A professional intentionally misstates a material fact to mislead a client and the client is injured as a result of justifiably relying on the misstated fact

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9
Q

Constructive Fraud

A

Conduct that is treated as fraud under the law even when there is no proof of intent to defraud, usually because of the existence of a special relationship or fiduciary duty

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10
Q

Under traditional common law accountants were only liable to…

A

their clients – privity of contract.

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11
Q

Today numerous third parties rely on opinions of accountants and auditors:
Who are these third parties?

A

Banks, shareholders/investors, creditors, competitors

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12
Q

What are some reasons why accountants should be liable to third parties?

A

Professionals are more likely to be careful when we know there is liability

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13
Q

How states hold Accountants liable to third parties depends on which of 3 doctrines the state follows:

A

Ultramares Rule
The Restatement Rule
“Reasonably Foreseeable Users” Rule

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14
Q

Ultramares Rule

A

traditional rule concerning accountant’s liability to 3rd parties based on lack of privity between accountants and 3rd parties.

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15
Q

Touche is an accounting firm who falsified the net worth of a company owned by Stern. Stern declared bankruptcy. Ultramares Corp had loaned money to stern based on the falsified financial records and so they sue the accounting firm (Touche).

A

Rule: Court says the accounting firm only owed a duty of care to those persons for whose “primary benefit” the statements are intended. So, ultramares corp loses their lawsuit and recovers nothing – they were NOT a primary beneficiary of the falsified financial statements.

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16
Q

The Restatement Rule

A

since most of the work done by auditors is intended for use by 3rd parties (not in privity or even near privity), a majority of courts have adopted the Restatement 3rd of Torts rule.

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17
Q

Restatement 3rd of Torts rule:

A

Accountants are subject to liability for negligence not only to their clients but also to: foreseen or known users of their reports or financial statements… this means foreseen to the auditor when the audit is published.

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18
Q

What rule of third-party liability does Texas follow?

A

The restatement rule

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19
Q

“Reasonably Foreseeable Users” Rule

A

only a small, minority of courts follow this and it says: accountants are held liable to any users whose reliance on an accountant’s statements or reports was reasonably foreseeable…..extends liability to people who it ‘might’ harm anything at any point (VERY broad)

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20
Q

SOX

A

liability exists here on accounting firms who provide auditing services to companies (“issuers”) of securities sold to the public

21
Q

An issuer is:

A
  1. A company that has securities registered under section 12 of 1934 Act, OR
  2. That is required to file reports under section 15d of the 1934 act, OR
  3. that has filed a registration statement that hasn’t become effective under the 1933 Act
22
Q

To ensure that auditors remain independent of the firms that they audit, Title II of the SOX Act does:

A
  1. Makes it unlawful for Registered Public Accounting Firms to perform both audit and non audit services for the same company at the same time
  2. Requires reapproval for most auditing services
  3. Requires audit partner rotation
  4. Requires RPAFs to make timely reports to the audit committees of the corporations
  5. Previously employed by the auditor and participated in any capacity in the audit of the corporation during the one-year period preceding the date when the audit began.
23
Q

Document Retention

A

The SOX Act also requires accountants who audit or review publicly traded companies to retain all working papers related to the audit or review for a period of 5 years (now 7 years). Violators can be sentenced to a fine, imprisonment for up to ten years, or both.

24
Q

Document Destruction

A

The SOX Act provides that anyone who destroys, alters, or falsifies records with the intent to obstruct or influence a federal investigation or in relation to bankruptcy proceedings can be criminally prosecuted and sentenced to a fine, imprisonment for up to 20 years or both.

25
Q

Liability under Securities Act of 1933

A

accountants prepare and certify the issuer’s financial statements included in a registration statement

26
Q

Liability under section 11 - 1933

A

Civil liability of accountants extends to anyone who acquires (like a purchaser) a security covered by a registration statement that contains misstatements and omissions of material facts.
Purchaser proves they suffered a loss

27
Q

Defenses for liability under section 11 - 1933

A

the accountant can defend him/herself by a showing of due diligence or other relevant defenses: comparative responsibility, reckless behavior but not the proximate cause

28
Q

Liability under section 12(2) - 1933

A

accountants can have civil liability if they participated in preparing materials for investors like a prospectus, etc., in which a false misrepresentation or omission is made intentional or unintentional

29
Q

Criminal liability under section 12(2) - 1933

A

Up to 5 years in prion and fines up to $10,000

30
Q

Liability under Securities Act of 1934 - Section 18

A

Civil liability is imposed on an accountant who makes or causes to be made in any application, report or document a statement that at the time and in light of the circumstances was false or misleading with respect to any material fact.

31
Q

Who can sue under section 18 of 1934 Act?

A

This section is narrow in scope and applies only to: buyers and seller of securities. Liability is in the documents that have to be filed to the SEC.

32
Q

What is the statute of limitations for 1934 section 18?

A

1 year

33
Q

What is the defense for 1934 section 18?

A

Acted in good faith

34
Q

Scope of liability under §10(b) and SEC Rule 10b-5 (1934)

A

prohibits “any person” (including an accountant) to use in connection with the purchase or sale of any security, any manipulative or deceptive device or plan that is counter to SEC rules and regs.

35
Q

Extent of liability under §10(b) and SEC Rule 10b-5 (1934)

A

accountants only liable to sellers or purchases of securities
i. Privity is NOT necessary
ii. Scienter (intent) is necessary; ordinary negligence is NOT enough

36
Q

Do Accountants have a duty to correct misstatements that they discover in previous financial statements if they know that potential investors are relying on those statements?

A

Yes

37
Q

Private Securities Litigation Reform Act of 1995
Who do you have to report illegal activities to?

A

The company board of directors, audit committee, and in some instances the SEC. (Depends on what has been found)

38
Q

Criminal Violations of Securities Laws - 1933 Act – for willful violations

A

jail for up to 5 years and/or a fine of up to $10,000

39
Q

Criminal Violations of Securities Laws - 1934 Act – for willful violations

A

jail for up to 10 years and/or a fine of up to $100,000

40
Q

Criminal Violations of Securities Laws - SOX Act – for willful violations

A

for false or misleading certified audit statements used in securities filings – jail for up to 20 years and/or fines of up to $5 million

41
Q

Criminal Violations of Tax Laws - Preparation of a false tax return

A

Felony!! Fine up to $100,000 for an individual ($500,000 for a corporation), jail for up to 3 years

42
Q

Criminal Violations of Tax Laws - Negligent understatement of client’s tax liability

A

$1,000 per return

43
Q

Criminal Violations of Tax Laws - Willful understatement of tax liability

A

$5,000 really hard to prove

44
Q

Criminal Violations of Tax Laws - Reckless/Intentional disregard of rules and regs

A

$5,000

45
Q

Failing to provide taxpayer with copy of return
Failing to sign return
Failing to provide appropriate tax ID number smaller fines
Aiding and abetting another’s understatement of tax liability

A

tax preparer liability is limited to 1 penalty per taxpayer per tax year if you violated more than one of these

46
Q

Criminal Violations of Tax Laws - Aiding and abetting another’s understatement of tax liability

A

$1,000 per document ($10,000 for corporate return)

47
Q

Texas makes accountant-client communications privileged except if required to be disclosed by:

A

the IRS, the SEC, or a court

48
Q

Does federal law consider accountant-client communications to be privileged?

A

No… Basically… As an accountant you don’t have privileged information

MGMT 643 (29 decks)

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