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Flashcards in Professional Responsibilities and Business Law Deck (37):

Common Law

Historically established by judicial precedents. Much is now codified into state statutes.

1. Breach of Contract

2. Ordinary Negligence (Ultramares: accountant only liable to primary beneficiaries)

3. Gross Negligence 



Constructive fraud

Failure to use even slight care (gross negligence). Contributory negligence not a defense. Punitive damages may be awarded.

Scienter: (1) intent to mislead with accountant's knowledge of falsity or (2) Reckless disregard of the truth


Contributory negligence

Negligence on the part of the plaintiff that contributed to the party's loss. Will typically mitigate some or all of the defendants charges.


Due diligence

Securities Act of 1933 - standard of care: reasonable investigation, reasonable grounds of belief



Misrepresentation intended to mislead, or made with reckless disregard for the truth


Joint liability

Joint defendant may be forced to pay the entire amount of a judgement


Joint and several liability

Joint liability where a defendant may collect from other defendants their proportionate shares of the judgement


Joint Ethics Enforcement Program (JEEP)

joint program of the AICPA and state CPA societies to jointly investigate ethics violations



failure to perform with the level of skill and judgement possessed by a typical professional (ordinary negligence). Contributory negligence may be used in defense. Punitive damages not assessed. 


Primary beneficiary

party other than the client who primarily benefits from the contracted services provided by the CPA


Privileged Communication

not subject to disclosure in court. Must be established by law. Generally accountant-client communication is not privileged



a mutual relationship established between parties typically by contract (ex: client and third-party beneficiaries)


Public Company Accounting Oversight Board (PCAOB)

5 member nonprofit org created by SOX Act to oversee the audits of public companies (2 CPAs, 3-non CPAs)

1. registers and inspects public accounting firms (audits of issuers)

2. sets standards on auditing, quality control, independence and preperation of audit reports



Public Company Accounting Reform and Investor Protection Act

Sarbanes-Oxley Act - set a new set of enhanced standards for public company boards, management and public accounting firms. Established the PCAOB.

Workpaper retention: (1) rquires retention of workpapers for 5 - 7 years (2) makes illegal destruction or falsifying records to impeed investigations (3) imprisonment up to 20 yrs

Audit partner must change every 5 years


Racketeer Influenced and Corrupt Organization (RICO) Act

allows prosecution of organized criminals. has been used to pursue CPA firms who engage in multiple instances of wrongful acts. allows Treble damages.


Securities Act of 1933

Covers initial registration of securities (within 3 years of IPO).

Plaintiff must prove (1) damages were incurred and (2) there was material misstatement in the registration statement (plaintiff need not prove reliance or negligence)

Defense: due diligence, plaintiff's knowledge of misstatement, lack of causation

Damages: difference between amount paid & market value at time of suit, not to exceed price at which security was offered to the public.


Securities Exchange Act of 1934

covers secondary purchase and sale of securities and for equity securities where the corp has over $10 mill in assets and 500 stakeholders. Plaintiff must prove: (1) damages resulted (2) there was material misstatement (3) reliance (4) scienter. 

Auditors must establish procedures to (a) detect matierial illegal acts (b) identify material related-party transactions and (c) evaluate ability of firm to continue as going concern.

Illegal Acts: if material, auditor must report to the Board. The Board must report to the SEC within one day. If not done, the auditor must furnish SEC with a copy of the auditor's report.


Several liability

joint defendants are responsible only for their proportionate share of the judgement


State boards of accountancy

regulate practice of public accounting


Statements on Standards for Tax Services

AICPA standards for CPAs that perform tax services for clients


Treasury Department Circular 230

regulatory requirements regarding authority to practice before the IRS


US Securities and Exchange Commission

responsible for enforcing the federal securities laws and regulating the securities industry


Accountants Liability (Common Law)


Foreseen party

Third party who the accountant knew would rely on financial statements


Foreseeable party

Any party that accountant could reasonably foreseen would receive and use financial statements


Auditors Liability

Federal Securities Acts


Form 8-K Disclosure

Required by suecurities laws - discloses material events such as change in corporate control, amount of issued securities, illegal acts, reports a change in auditor (client discloses reason for the change, and the auditor agrees or states their disagreement).

must be filed within 4 days of occurance triggering the event



Subsequent Events - Liability

Accountant my be held liabile if they make assurance that there are no material changes when infact there are.


Tax Positions

Realistic possibility: requires as much as one-third likelihood of sucess

More likely than not standard requires more than 50% probability of sucess

Substantial authority: when the weight of authorities supporting the position is substantial in relation to the weight of those taking a contrary position. Requires at least a 40% probability of sucess. 

Reasonable basis: requires at least a 20% chance of success


Covered Opinion

Covered under Circular 230 - written advice involving a listed transaction or a place or arrangement with the principal purpose of tax avoidance.


Reliance Opinion

Under Circular 230 - Written advice that concludes the tax position is more likely than not to be successful.


Tax preparer penalties

The greater of $1,000 or 50% of the income derived 

If error resulted from willful attempt to understate liability or gross negligence: The greater of $5,000 or 50% of income derived

Penalties can be avoided if there is evidence of: (1) substantial authority (40%), (2) adequate disclosure and reasonable basis for the position (20%) (3) more likely than not standard (for tax shelter positions) (50%) and (4) reasonable cause


Uniform Accountancy Act (UAA)

developed by the AICPA to provide state jurisdictions a model act to regulate CPAs

1. Bachelors Degree and 150 semester hours required

2. Sets continuing education standards

3. facilitates interstate practice and free movement of CPAs between states

4. Ethical provisions: AICPA Code of Professional Conduct

5. State boards are responsible for issuing licenses


AICPA Disciplinary Stystems

Professional Ethics Executive Committee (JEEP) - AICPA committee disciplinary measures may include:

a. No violation/dismissal

b. Public Admonishment

c. Corrective action (continuing education)

d. Suspension for up to two years

e. Explulsion from AICPA: for (1) having license revoked by state board, (2) conviction of a crime punishable by a sentance over one year (3) files a fraudulent tax return (4) intentionally fails to file personal return


SEC Disiplinary actions

1. revoke of suspend an accountant from practicing before SEC (they cannot serve as an auditor for issuer

a. willfull violation of federal securities laws or regulations

b. upon conviction of felony or misdemeanor in which moral turpitude was involved

c. can penalize with civil fines and mandates to pay profits gained from violations.

2. can prohibit an accountant or firm from doing work for an issuer

3. Criminal Liability: (a) Intentional misleading omission of material facts and (b) putting false information in the registration statement

Subject to $10k fine and 5 years in prison


Third Party Liability

(Common Law)

1 .Ultramares: accountants are held liable for ordinary negligence only to parties who primarily benefit from the audit or statements.


Private Securities Litigation Reform Act

Ammends the FSA of 1933 and FSEA of 1994.

1. reducess lawsuits against accountants by creating a "safe harbor" for preparation of forward-looking statements

a. auditors must identify assumtions

b. awards costs and attorneys' fees against parties failing to fulfill pleading requirements

c. accountants have several liability unless they knowingly caused harm (if knowingly then owe their porportionate share + 50%)

2. Requires auditors to establish procedures to:

a. detect material illegal acts: must inform the Board, and SEC if Board does not

b. identify material related-party transactions

c. evaluate the ability of firm to continue as a going concern