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Regulation > 2.3 - Federal Statutory Liability of CPAs and Others > Flashcards

2.3 - Federal Statutory Liability of CPAs and Others Flashcards

1
Q

1933 Act - Section 11:

How is the accountant who prepares / audits the financial statements included in a registration statement or prospectus liable regarding the information in the financial statements under Section 11 of the 1933 Act?

A
  • Accountant civilly liable without proof of fault who prepares / audits FS included in a registration statement or prospectus if materially misstated or info omitted
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2
Q

1933 Act - Section 11:

Does the plaintiff need to prove reliance, negligence or fraud under Section 11 of the 1933 Act?

A

No

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3
Q

1933 Act - Section 11:

Identify the parties a plaintiff may sue

A
  • Issuer
  • Every person who signed registration statement
  • Every director / partner issuing security
  • Experts who participated in preparation
  • Every underwriter
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4
Q

1933 Act - Section 11:

Who may the purchaser sue for failing to register under the 1933 Act?

A

only the seller

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5
Q

1933 Act - Section 11:

What must the plaintiff prove in order to sue?

A
  • Acquired the security
  • Incurred a loss
  • Registration statement contained material misstatement
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6
Q

1933 Act - Section 11:

Define privity

A

participation in the knowledge of something private or secret

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7
Q

1933 Act - Section 11:

Define Prima Facie

A

at 1st appearance before investigation

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8
Q

1933 Act - Section 11:

What is the statute of limitations granting the purchaser the right to sue due to omitted information?

A
  • must bring civil action within 1 year of the discovery of the omission and within 3 years of the offering date
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9
Q

1933 Act - Section 11:

What portion of the financial statement is the CPA liable for if information is omitted or misstated?

A
  • liable only for that portion of a statement for which responsible
    • Other portions extend liability to responsible party
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10
Q

1933 Act - Section 11:

What is a CPAs defense under section 11 of the 1933 Act?

A
  • Prove diligence
    • Proof that reasonable investigation was conducted
  • Reasonably believed the FS were free of material omission or misstatement
  • Must be based on reasonable investigation
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11
Q

1933 Act - Section 11:

What damages might a buyer seek?

A
  • Awarded up to monetary loss
  • Price paid vs. sale or market price
  • Resale of securities not necessary
    • Example: Plaintiff purchase stock for $30 and sell for $20 if CPA liable then plaintiff can recover $10 difference in purchase price and sell price
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12
Q

1933 Act - Section 11:

What is the criminal liability under the 1933 Act for willful misrepresentation or omission?

A
  • Max penalty up to 5 years in prison and $10,000 fine
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13
Q

1934 Act - Section 18

What is prohibited under section 18 of the 1934 Act?

A
  • False or misleading statements in SEC filing
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14
Q

1934 Act - Section 18

Identify the plaintiffs under section 18 of 1934 Act

A

purchasers or sellers who rely and incur damages

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15
Q

1934 Act - Section 18

What must a plaintiff prove in order to sue under Section 18 of the 1934 Act?

A
  • Must prove reliance on statement
    • Proof that the price of the security was affected by the misstatement (fraud on the market theory) may substitute for proof of reliance
  • Must prove damage or loss
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16
Q

1934 Act - Section 18

What is a CPAs defense under Section 18 of the 1934 Act?

A
  • Good faith and absence of knowledge
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17
Q

What is Section 10B-5 under the 1934 Act?

A
  • Anti-fraud prevention with regard to purchase or sale of any security (registered or not)
  • Commonly applied to insider trading and corporate misstatement
18
Q

What is required to be liable unde Rule 10B-5 under the 1934 Act?

A
  • Requires misstatement or omission of material fact
  • Reliance on misstatement, loss caused
19
Q

What is the difference between Section 18 of the 1934 Act and Section 10B-5?

A
  • Defendant must have had scienter (intent)
  • Acting without good faith
20
Q

What are the remedies under Section 10B-5?

A
  • Damages
  • Rescission of securities contract
  • Injunctions from practice
21
Q

When is criminal liability imposed under the 1934 Act?

A
  • Imposed for willfully / knowingly making a false or misleading statement
    • Reckless disregard for the truth
22
Q

What are the fines for individuals who are found criminally liable under the 1934 Act?

A

fines of up to $5 million or 20 years in prison

23
Q

What are the fines or penalties for corporations who are found to be criminally liable under the 1934 Act?

A
  • maximum penalty of $25 million
    • Civil liability for money damages and criminal liability for a fine
24
Q

What is the Sarbanes Oxley Act of 2002 (SOX) and what did it create?

A
  • regulates the public accounting profession by establishing the Public Company Accounting Oversight Board (PCAOB)
  • SOX applies to issuers of publicly traded securities subject to federal securities laws
  • created the audit committee
25
Q

What is the audit comittee responsible for?

A

appointing, compensating, and overseeing the work of the public accounting firm employed by the issuer

26
Q

What are the criminal penalties, established by the Sarbanes Oxley Act of 2002, imposed on those found guilty of fraud?

A
  • up to 25 years in prison
27
Q

What does Section 404 of SOX require management to do?

A
  • Report on internal control over financial reporting
28
Q

How many audit opinions does Section 404 of SOX require?

A

two - one for internal control & another for financial statements

29
Q

Are small firms exempt from dual audit requirements?

A

Yes

30
Q

What is the market capitalization requirement to be considered a small firm?

A

< $75 million

31
Q

Identify the nonaudit services that cannot be provided to audit clients by auditors without PACOB or audit committee preapproval

A
  • Management consultation
  • Valuation services
  • Investment banking
  • Services not specifically excluded may be undertaken with approval
    • Can also serve as company’s tax compliance advisor with approval from audit committee
32
Q

What is the waiting period requirement for employment of a former auditor?

A

1 year

33
Q

Identify the time restrictions for audits

A
  • 5-year lead partner rotation
  • 7-year workpaper retention
  • Annual inspections
34
Q

Who does the Dodd - Frank Wall Street Reform and Consumer Protection Act of 2010 extend to?

A
  • Financial service industry
  • Consumer protection
  • Financial markets
  • Securities laws
  • Financial reporting & governance
  • Broker, dealer audits
    • Auditors are subject to inspection by the PCAOB and possible sanctions
35
Q

What is the Financial Stability Oversight Council and what is its purpose?

A
  • Identify financial system risks
  • Comment to the SEC regarding accounting issues
  • Report annually to Congress about financial market & regulatory matters
36
Q

What is the capital requirement in which investmnent advisors are required to register with the state regulators?

A

$25 million - $100 million of assets

37
Q

When might an investment advisor register with the SEC under the Dodd - Frank Act?

A

when the advisor is required to register with at least 15 states

38
Q

How often do shareholders have a nonbinding vote on compensation for specified corproate officers under the Dodd - Frank Act?

A

once every 3 years

39
Q

What is a clawback policy?

A
  • policy by a public company defining how to recover performance-based executive compensation after a financial restatement
40
Q

What is the SOX requirement to strengthen auditor independence?

A
  • Select auditors through audit committees
  • Short swing profits arise from the sale and purchase of the issuer’s stock within 6 months or 180 days
41
Q

Define aiding and abetting the Securities Exchange Act of 1934

A
  • Accountant is aware of his / her participation in an improper activity and knowingly aids the activity, he / she is liable for aiding and abetting
  • Silence may constitute aiding, not abetting
42
Q

What is the statute of limitation of a plaintiff bringing suit under the 1934 Act for aiding and abetting?

A
  • within the earlier of 2 years after discovery of the facts on which the suit is based or 5 years after the cause of action arose

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