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Audit Final: Chapter 20
Terms in this set (42)
How many accounting lawsuits are filed per year?
How long and how much is the average weakest accounting lawsuit?
About 3 years and $3 million in pracice protection costs (insurance and litigation).
Broad categories of Law Auditors can be held liable under
Common and Statutory
Court Decisions by Judges (Civially Liable)
Written Law (SOX, etc). Civillay or Criminally Liable
Common Law: Liable to client if there is...
Breach of Contract or Negligence
Breach of Contract
Didn't perform within the confines of the contract (Engagement Letter)
Negligence: Client Proves What 4 things?
There was a Duty of Due Care, The Duty was Breached, There is Causation for Damages (What Auditor did caused the problem), and Damages were suffered.
All or nothing negligence. If the plaintif is partially at fault, no damages awarded, even if only 0.5% at fault.
Relative fault is assigned. If auditor is only 70% at fault, then they only pay 70% of the total damages.
When are we liable to 3rd parties?
Not breach of contract, by definition they aren't in the contract... We are liable for any negligence, IF the 3rd party can prove standing.
3rd Party: Standings: Privity
Were they a party to the contract? IF yes, they have privity, and a claim.
3rd Party: Standings: Near Privity
3rd party had direct contact with the auditor (a meeting, phone call, etc). This is unlikely to happen. Unethical for auditor to talk with a shareholder in private anyway.
3rd Party: Standings: Foreseen 3rd Party
Restatement Standard. The 3rd party isn't specifically stated, but likely related. Groups that are actually forseen. Such as banks that loan the client money, etc.
Foreseen 3rd Party: Shareholders
Yes they are reasonably foreseen, but they are not counted. It is unresonable, because even if they had only 1 share they could sue every firm in the country. Just not fair to the auditor.
3rd Party: Standings: Reasonably Forseeable 3rd Party:
Groups that may not have been foreseen but should have been.
What is the most common standing to be used for negligence by 3rd parties?
Forseen 3rd Party standing.
Fraud/Gross Negligence Must Prove What 5 Things?
Fake Representation, Acct Knows its false, Acct knows/assumes 3rd party will rely on it, 3rd party actually relied on it, 3rd Party suffered damages.
Civil. Can by compensatory or punitive. Amounts can be apportioned or "joint and several".
The amount is based on what sets the 3rd party back to square 1.
A damage amount meant to punish the firm for its outrageous conduct.
Damages are based on the % at fault, just like proportionate negligence. Some states don't allow this method.
Damages: Joint and Several
3rd party pais their piece of damages, auditor pays their piece AND the fault of everyone else.
SEC Act of 1933
Regulates the information disclusure for NEW filers (IPOs and new inssuance to public).
SEC Act of 1933: Section 11
Plaintive doesn't have to prove anything except that they SUFFERED A LOSS and F/S were wrong!! They didn't even have to read the F/S before they suffered. Audito must prove they weren't wrong. *
(I think this Section 11 ONLY applies to 33 stuff... that is NEW FILERS / New Issuance! The following years can't use it).
SEC Act of 1934
Regulates the ongoing reporting of public companeis. Involves the 10-K, 10-Q, *-K, etc.
SEC Act of 1934: Section 18
Firm's client is liable if they make a false / misleading statement.
SEC Act of 1934: Rule 10b(5)
Auditor is liable if: there is a material factual misrepresentation, plaintiff relied on F/S, and plaintiff suffered damages. Or if Scienter is Present
Knowingly commits an act knowing it's wrong. Basically fraud.
Private Securites Litigation Reform Act of 1995
Legally provides concept for apportioned liability. Prohibited fishing expeditions (lawsuit filed before evidence found).
Securities Litigation Uniformed Standards Act of 1998
Made to minimize plaintiff's inappropriate behavior. State courts are more plaintiff friendly usually, so this act says "if ___ happens, you have to go to (state or federal)."
SOX Act of 2002
600+ pages.... can prevent firms from adding new clients. Acts as the moderator.
SOX Act of 2002: Section 302
CEO and CFO have to sign off every quarter on fairness of F/S and that they've cmoplied with laws and regs.
SOX Act of 2002: Section 906
Same as 302, but annually (4th quarter)
SOX Act of 2002: Section 404
CFO and Auditor sign off on reasonableness. CEO on effectiveness, Auditor on effectiveness of ICFR at year end.
SOX Act of 2002: Sanctions
If the client / firm violate the SOX sections, They can face from the SEC: suspended priviledges, fines, remediation. FIrm cannot bring new clients.
Foreign Corrupt Practices Act (FCPA)
If we are aware of any FCPs, we must inform the board or become liable as well. (Report them to the Enforcement Division of the SEC)
Racketeer influenced & Corrupt Organization Act (RICO)
If plaintiff wins, defending firm must pay trebel damages.
Damages/Punishment Under Statutory Law: Civil
no punitive damages, b/c it is common law.
Damages/Punishment Under Statutory Law: Criminal
Can be held criminally liable. Can go to jail in criminal cases if they break statutory law.
SOX Act of 2002: How long must we retain workpapers?
Must maintian them for at least 5 years.
SOX Act of 2002: What is another criminal offense?
Taking a harmfula ction in retaliation against anyone who voluntarily comes forward to report a suspected accounting or securities fraud.
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