Flashcards in Chapter 5 - Legal Liability Deck (20):
When a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions.
occurs when the auditor issues an incorrect audit opinion because it failed to comply with the requirements of auditing standards.
represents the possibility that the auditor concludes after conducting an adequate audit that the FINS were fairly stated when, in fact they were materially misstated. Audit Risk is unavoidable!
We are human, we make mistakes
Levels of Negligence to Fraud
1. Ordinary Negligence
2. Gross Negligence
3. Constructive Fraud
Four Major sources of auditors legal liability
2. 3rd parties
Defenses from clients
1. Lack of duty - First and least expensive
2. Contributory Negligence - push it back onto client
3. Absence of causal connection - some other event caused it
4. Non-negligent performance - last and best defense, also most expensive, Prove we are following GAAS/PCAOB
Defenses from 3rd parties
1. Credit alliance - Credit alliance v. Arthur Andersen
2. Restatement of torts - Reasonably limitd and identifiable group of users who have relied on the CPAs work.
3. Foreseeable users - Unlimited class
4. Ultra-mares Doctrine - has to be a primary user or beneficiary.
Cenco Incorporated v, Siedman & Siedman
Liability to Clients - Siedman & Siedman won using Contributory Negligence and pushed it onto Cenco's mgmt.
1136 Tenants v. Max Rothenberg and Co.
Liability to Clients - 1136 Tenants won because Max Rothenberg and Co. didn't look into the "missing invoices"
Ultra-mares Corporation v. Touche
Liability to Third Parties - Ultra-mares lost because they weren't primary beneficiaries.
Rusch Factors v. Levin
Liability to Third Parties - Levin lost because Rusch Factors was under the Restatement of torts
Credit Alliance v. Arthur Andersen
Liability to Third Parties - Arthur Andersen lost because Credit Alliance was a primary beneficiary
Escottet al. v. BarChris Construction Co.
Securities Act of 1933
Hachfelder v. Ernst & Ernst
Securities Act of 1934
Howard Sirota v. Solitron Devices
Securities Act of 1934
United States v. Andersen
Criminal Liability - Obstruction of Justice
United States v. Simon
Laws that have been passed by the U.S. Congress and other governmental units