REG 3 - Legal Duties and Responsibilities Flashcards Preview

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Flashcards in REG 3 - Legal Duties and Responsibilities Deck (25):
1

CPA Talmac's engagement letter with his tax client contained a provision that the client probably did not notice when he signed the engagement letter. It absolved Talmac of any liability should s/he breach the contract with the client. This proved a fortuitous provision for Talmac, who did breach the contract by providing substantially defective tax advice that cost the client more than $10,000 in penalties and interest. Which of the following is true?
A. The liability disclaimer will protect Talmac from liability.
B. The liability disclaimer will probably be ignored by a court.
C. A and B.
D. None of the above.

B. Most courts do not allow professionals such as doctors, lawyers, and accountants to avoid liability for their malpractice via such disclaimers. Courts usually hold that such disclaimers violate public policy and are, therefore, unenforceable.

2

Under the "Ultramares" rule, to which of the following parties will an accountant be liable for negligence?
Parties in privity
Foreseen parties

Yes, No
The "Ultramares" rule, established in a 1931 case of the same name, requires privity before an accountant is liable for negligence. Other rules, such as the Restatement rule, allow foreseeable users who rely on a negligently false statement to sue.

3

Which of the following statements is generally correct regarding the liability of a CPA who negligently gives an opinion on an audit of a client's financial statements?
A. The CPA is only liable to those third parties who are in privity of contract with the CPA.
B. The CPA is only liable to the client.
C. The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion.
D. The CPA is liable to all possible foreseeable users of the CPA's opinion.

C. There are three general viewpoints regarding an accountant's liability to third parties. One view requires privity of contract for a third party to recover. Another view allows all reasonably foreseeable users of an accountant's report to sue. But the majority view, known as the Restatement view, limits an accountant's liability to a limited class of actually foreseen users.

This question obviously asks the student to apply the majority (Restatement) view.

4

Hark CPA, failed to follow generally accepted auditing standards in auditing Long Corp.'s financial statements. Long's management had told Hark that the audited statements would be submitted to several banks to obtain financing. Relying on the statements, Third Bank gave Long a loan.
Long defaulted on the loan.

In a jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will
A. Win because there was no privity of contract between Hark and Third.
B. Lose because Hark knew that banks would be relying on the financial statements.
C. Win because Third was contributorily negligent in granting the loan.
D. Lose because Hark was negligent in performing the audit.

A. The Ultramares rule is applied in only a few jurisdictions. It normally allows recovery by a third party only if there was privity of contract between the accountant and third party.

5

Cable Corp. orally engaged Drake & Co., CPAs, to audit its financial statements.

Cable's management informed Drake that it suspected the accounts receivable were materially overstated. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the financial statements to obtain a loan to expand its operations.
Cable defaulted on the loan and incurred a substantial loss.

If Cable sues Drake for negligence in failing to discover the overstatement, Drake's best defense would be that Drake did not
A. Have privity of contract with Cable.
B. Sign an engagement letter.
C. Perform the audit recklessly or with an intent to deceive.
D. Violate generally accepted auditing standards in performing the audit.

D. In a negligence case, the plaintiff must show that the CPA did not use reasonable care or did not act as a reasonable CPA in the circumstances. If Drake can show that he followed GAAS in preparing the report, it is strong evidence that he acted reasonably. It is not an absolute defense, but it tends to show that he did what other accountants would have done in the same situation.

6

Which of the following is the best defense a CPA firm can assert in a suit for common law fraud based on its unqualified opinion on materially false financial statements?
A. Contributory negligence on the part of the client.
B. A disclaimer contained in the engagement letter.
C. Lack of privity.
D. Lack of scienter.

D. Scienter involves whether or not a person or company has a "guilty mind." One of the requirements of fraud is an intent to deceive. Therefore, if a firm did not intentionally make a misrepresentation and has no "guilty mind," no fraud has occurred.

7

A CPA who fraudulently performs an audit of a corporation's financial statements will
A. Probably be liable to any person who suffered a loss as a result of the fraud.
B. Be liable only to the corporation and to third parties who are members of a class of intended users of the financial statements.
C. Probably be liable to the corporation even though its management was aware of the fraud and did not rely on the financial statements.
D. Be liable only to third parties in privity of contract with the CPA.

A. In most jurisdictions, the CPA will be liable if foreseeable users rely on the fraudulently prepared statements and suffer a loss. This is true whomever the plaintiffs may be, so long as they can prove reliance and loss and that they are foreseeable users.

8

T/F: CPA Dilberg was careless in preparing a financial statement that did not adequately reflect the questionable collectability of a loan his client had made to a third party. The client later sued Dilberg, who proved that the loan was already uncollectable at the time Dilberg had made his error. Dilberg is probably liable to his client.

False.
A "normal" audit is not intended to uncover fraud, shortages, defalcations, or irregularities in general, but is meant to provide auditor evidence needed to express opinion on fairness of FS.

9

T/F: A plaintiff's contributory negligence is often a good defense in fraud cases.

False.
Only a Negligence Liability to the client or third parties would a plaintiff's contributory negligence warrant a good defense, not in fraud cases.

10

Which is critical to a conviction under the mail fraud statute?
A. That defendant be involved in a fraudulent scheme for which sending a letter through the mail is an essential part.
B. The defendant mails the letter himself.
C. A and B.
D. None of the above.

A. This choice states the essence of a mail fraud violation.

11

Waxo, Inc., is a small, privately held corporation that was caught paying bribes to foreign heads of state in order to secure government contracts. Waxo hid these transactions, in part, by falsifying its accounting records. Which of the following is true?
A. Waxo violated the antibribery provisions of the FCPA.
B. Waxo violated the accounting provisions of the FCPA.
C. A and B.
D. None of the above.

A. By paying these bribes, Waxo violated the antibribery provisions of the FCPA. These provisions apply to almost all American companies.

12

Plaintiff (P) came into a huge sum of money. An accounting firm (D) advised P on two tax-planning strategies, opining that they were "more likely than not" to be upheld by the IRS, and helped him implement them. They were known as FLIPs and BLIPs, and involved buying and exchanging warrants, options, and shares of various Swiss and Cayman Islands companies. Ultimately, the IRS audited three years worth of P's tax returns because these were aggressive tax shelters that the IRS had targeted for prosecution. P sued D and others under RICO for a violation of Sec. 1962(c). Which of the following is true?
A. Because D has not yet been found criminally liable for securities fraud, P cannot pursue its RICO claim.
B. D is probably liable for a 1962(c) violation.
C. A and B.
D. None of the above.

A. When a RICO claim is predicated upon claims of securities fraud, as here (since these bogus strategies involved options, warrants, and shares of stock), no RICO civil suit can be brought until defendant has been criminally convicted. That is not true of any of the other RICO "predicate acts," but it is true of securities fraud. This case was dismissed.

13

In a RICO 1962(c) case brought by a major university, an accounting firm (D) had provided audit, accounting, and consulting services for a company that became insolvent. The plaintiff claimed that D firm had issued false audit reports, provided other accounting services, and attended board meetings of the insurer. Which of the following is true?
A. The case will probably be dismissed, because D did not conduct or participate in the conduct of the fraudulent enterprise.
B. The university will probably recover.

A. Defendants are liable under 1962(c) only if they "conduct or participate in the conduct" of the racketeering enterprise. Even if all of the other elements of a 1962(c) violation are present here, D did not become involved in managing the firm. It stuck to accounting activities. Even if it did them wrongfully, or even fraudulently, it cannot be liable under RICO.

14

A wire fraud conviction could be obtained against a defendant who was part of a fraudulent scheme for which transmission of a message through one of the following was a key element:
A. Telephone.
B. Telegraph.
C. E-mail.
D. All of the above.

D. Because each of the choices listed in A, B, and C involves the use of the "wires" and is covered by the broad federal wire fraud provision, this is the best answer.

15

A business manager (D) for an accounting firm was in charge of, among other things, purchasing equipment, procuring office supplies, and overseeing the day-to-day operation of the office. By using a company credit card to pay for various personal expenses, including property taxes, jewelry, clothing, and a wine cellar; accepting reimbursement for business-related expenses that D had paid for with a company credit card but said were out of pocket; and creating false invoices for nonexistent purchases for which she received reimbursement, D stole half a million dollars from the accounting firm. Several of the false invoices were e-mailed by D for purposes of seeking reimbursement. Which of the following is true?
A. D is guilty of theft but not wire fraud.
B. D is guilty of wire fraud.
C. A and B.
D. None of the above.

B. Because electronic transmission of the false invoices was essential to the execution of the fraudulent scheme, D was guilty of wire fraud.

16

In responding to the Enron-era frauds, SOX did not do which of the following?
A. Strengthen criminal penalties for securities fraud.
B. Restrict provision by auditors of public companies of non-audit services.
C. Require rotation of audit firms every seven years.
D. Create the PCAOB.

C. SOX did not require rotation of audit firms, only of the audit engagement partner and the reviewing partner and some other key partners. So this answer states the one thing SOX did not do and is therefore the correct answer.

17

Zing was chairman of China Construction Bank (CCB), a firm owned largely by the Chinese government. Zing loved golf and took a golf trip with two friends to California. Watkins, an employee of FIS, Inc., charged more than $10,000 on his corporate credit card to pay for the golf. He also paid Zing's son's education expenses in London. Soon thereafter, Zing awarded a $176 million contract to provide information services to CCB to Albany Co., a privately held company on whose behalf Watkins had been acting. Albany's books carried the payments made by Watkins as legitimate business expenses paid to a third-party consultant. The SEC launched an FCPA investigation. Which of the following is true?
A. Albany is in trouble under the FCPA's antibribery provisions.
B. Albany is in trouble under the FCPA's accounting provisions.
C. A and B.
D. None of the above.

A. Bribing an official of a company controlled by the Chinese government in exchange for a contract is the essence of what the FCPA's anti-bribery provisions are trying to stop.

Because Albany is not an SEC-registered firm, the FCPA's accounting provisions do not apply to it, so B is not an accurate choice.

18

T/F: XYZ Co., an NYSE-listed company that is incorporated in Delaware, did business in Indonesia. It has a contract with the Indonesian government whereby the government would reimburse certain types of expenses that XYZ incurred. XYZ paid bribes to various governmental officials in Indonesia to retain the contract. XYZ carried these bribes on its books as expenses of the type that were reimbursable by the Indonesian government. XYZ has probably violated the accounting provisions of the FCPA.

True

19

Salina wants to know which of the following recognizes an accountant-client testimonial privilege:
A. Federal courts creating procedural rules.
B. Congress for very limited purposes when tax practitioners are involved.
C. Approximately 15 state legislatures.
D. B and C.

D. Although the state and federal courts have generally refused to recognize any sort of common law statutory privilege for client-accountant communications, Congress (in §7525) and about 15 states have statutorily enacted such privileges.

20

In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct?
A. A member discloses confidential client information to a court in connection with arbitration proceedings relating to the client.
B. A member discloses confidential client information to a professional liability insurance carrier after learning of a potential claim against the member.
C. A member whose practice is primarily bankruptcy discloses a client's name.
D. A member uses a records retention agency to store clients' records that contain confidential client information.

C. It is certainly possible that a client would not want it known that s/he was considering filing for bankruptcy. Therefore, members who practice in that area must be sensitive to that fact.

21

T/F: Knowing and voluntary client consent to disclosure effectively removes the confidentiality duty regarding the relevant information.

True

22

T/F: The federal tax practitioner's testimonial privilege (§7525) typically covers client communications from clients to tax practitioners for purposes of tax return preparation.

False.
Section 7525 extends a modest testimonial privelege to clients of all tax advisers authorized to practice before the IRS, including accountants. However, the privelege has several exceptions and has been construed narrowly by the courts. Communication regarding solely the preparation of the tax return was construed narrowly.

23

T/F: In states that statutorily recognize an accountant-client testimonial privilege, the privilege may be invoked only by the client.

True

24

T/F: The federal courts have recognized an accountant-client testimonial privilege.

False.
Approximately 15 states have statutorily recognized an accountant-client privilege. Not federally though.

25

T/F: The state courts have recognized a common law accountant-client testimonial privilege.

False.
Approximately 15 states have statutorily recognized an accountant-client privilege. Not in every state though.

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