Securities Laws and Liabilities of CPAs Flashcards
(20 cards)
To WHOM do the reporting requirements and rules of the Securities Exchange Act of 1934 apply to?
A corporation that registered under the Securities Act of 1933 BUT
- that did not register under the Securities Exchange Act of 1934
What is a “Tender Offer?”
AN offer to shareholders to buy their stock to gain control of a corporation
What are some examples of a “Security” under the 1933 Act?
- Warrants
- Stock Options
- Limited Partnership Interests
NOTE: General Partnerships are NOT necessarily considered securities as the partners investment interest is probably attributed to their own effort
What is the extent of liability of a CPA who negligently prepares a client’s tax return?
Anyone in a class of third parties who the CPA knows will rely on the opinion
What would be considered a “substitute” for proof of reliance on a misstatement?
Fraud-On-the-Market Theory
i.e. Proof that the price of a security was affected by a material misstatement or omission
What requires audits to provide reasonable assurance of detecting illegal acts?
The Private Securities Litigation Reform Act of 1995
What “act” prohibits any scheme to defraud?
Rule 10(b)5 of the Securities Exchange Act of 1934
What element of fraud is not included in negligent misrepresentation?
Scienter
i.e. Negligent misrepresentation includes all elements of fraud except scienter, which is “actual” or “implied” knowledge of fraud
What type of causation is an element of negligence?
“Proximate Cause”
i. e. This means that the plaintiff must prove that
(1) the defendant breached a legal duty to the plaintiff and
(2) the breach actually and proximately caused the plaintiff’s damages
What is a characteristic of a “Primary Beneficiary?”
Identification of the third party (which would fall under this category if):
(1) the accountant is retained principally to benefit the third party
(2) the third party is identified, and
(3) the benefit pertains to a specific transaction
What is considered “Short-Swing” Stock under the Securities Exchange Act of 1934?
Profits arise from the sale and purchase (purchase and sale) of the issuer’s stock within 180 Days
i.e. a 6-month Period
When would a CPA be liable for “Punitive damages” under common law action?
WHEN the circumstances are extreme or aggravated
WHAT is considered a reasonable defense a CPA firm can assert in a suit for common law fraud resulting from preparation of a tax return?
LACK OF SCIENTER
i.e. false representation with knowledge of its falsity or with reckless disregard as to its truth
WHAT fact must be proven for a Plaintiff to prevail in a state-law negligent misrepresentation action against a CPA (Defendant) who prepared a borrower’s tax return?
The plaintiff justifiably relied on the misrepresentations
What is considered the statute of limitations on an action by a purchaser of securities relying on the Securities Act of 1933?
1-Year after the false statements or omissions of material fact were discovered or should have been discovered; Or
Within 3 years after the security was first offered to the public
What does the CPA need to prove to be exempt of liability under section 18 of the Securities Exchange Act of 1934?
Good faith and lack of knowledge of the statement’s falsity
What are one of the conditions that apply to private placement offerings under Regulation D of the Securities Act of 1933?
THE Securities cannot be the subject of an immediate unregistered reoffering to the public
i.e. this exempts securities to restriction so that they may be resold only by registration or in a transaction exempt from registration
WHAT would a Plaintiff be entitled to if they succeed in the Section 10(b) and Rule 10b-5 suit against a Defendant?
THE amount of any (loss) caused by the fraud (in the event that the Loss was fraud based)
WHAT (4) Conditions must be met in order to support a finding of “constructive” common law fraud
(1) misrepresentation of a material fact
(2) reckless disregard for the truth (i.e. Gross Negligence)
(3) reasonable reliance by the injured party
(4) Injury
WHEN is the Form 10-Q reported?
FOR the first 3-Quarters of the Fiscal Year
NOTE: If new information is reported/ discovered during Q4 of the year, this information will MOST likely be reported in the fiscal years’ 10-K and NOT the 10-Q (No 10-Q for Forth Quarter)
