2.3 - Federal Statutory Liability of CPAs and Others Flashcards
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?
- Accountant civilly liable without proof of fault who prepares / audits FS included in a registration statement or prospectus if materially misstated or info omitted
1933 Act - Section 11:
Does the plaintiff need to prove reliance, negligence or fraud under Section 11 of the 1933 Act?
No
1933 Act - Section 11:
Identify the parties a plaintiff may sue
- Issuer
- Every person who signed registration statement
- Every director / partner issuing security
- Experts who participated in preparation
- Every underwriter
1933 Act - Section 11:
Who may the purchaser sue for failing to register under the 1933 Act?
only the seller
1933 Act - Section 11:
What must the plaintiff prove in order to sue?
- Acquired the security
- Incurred a loss
- Registration statement contained material misstatement
1933 Act - Section 11:
Define privity
participation in the knowledge of something private or secret
1933 Act - Section 11:
Define Prima Facie
at 1st appearance before investigation
1933 Act - Section 11:
What is the statute of limitations granting the purchaser the right to sue due to omitted information?
- must bring civil action within 1 year of the discovery of the omission and within 3 years of the offering date
1933 Act - Section 11:
What portion of the financial statement is the CPA liable for if information is omitted or misstated?
- liable only for that portion of a statement for which responsible
- Other portions extend liability to responsible party
1933 Act - Section 11:
What is a CPAs defense under section 11 of the 1933 Act?
- 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
1933 Act - Section 11:
What damages might a buyer seek?
- 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
1933 Act - Section 11:
What is the criminal liability under the 1933 Act for willful misrepresentation or omission?
- Max penalty up to 5 years in prison and $10,000 fine
1934 Act - Section 18
What is prohibited under section 18 of the 1934 Act?
- False or misleading statements in SEC filing
1934 Act - Section 18
Identify the plaintiffs under section 18 of 1934 Act
purchasers or sellers who rely and incur damages
1934 Act - Section 18
What must a plaintiff prove in order to sue under Section 18 of the 1934 Act?
- 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
1934 Act - Section 18
What is a CPAs defense under Section 18 of the 1934 Act?
- Good faith and absence of knowledge
What is Section 10B-5 under the 1934 Act?
- Anti-fraud prevention with regard to purchase or sale of any security (registered or not)
- Commonly applied to insider trading and corporate misstatement
What is required to be liable unde Rule 10B-5 under the 1934 Act?
- Requires misstatement or omission of material fact
- Reliance on misstatement, loss caused
What is the difference between Section 18 of the 1934 Act and Section 10B-5?
- Defendant must have had scienter (intent)
- Acting without good faith
What are the remedies under Section 10B-5?
- Damages
- Rescission of securities contract
- Injunctions from practice
When is criminal liability imposed under the 1934 Act?
- Imposed for willfully / knowingly making a false or misleading statement
- Reckless disregard for the truth
What are the fines for individuals who are found criminally liable under the 1934 Act?
fines of up to $5 million or 20 years in prison
What are the fines or penalties for corporations who are found to be criminally liable under the 1934 Act?
- maximum penalty of $25 million
- Civil liability for money damages and criminal liability for a fine
What is the Sarbanes Oxley Act of 2002 (SOX) and what did it create?
- 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
What is the audit comittee responsible for?
appointing, compensating, and overseeing the work of the public accounting firm employed by the issuer
What are the criminal penalties, established by the Sarbanes Oxley Act of 2002, imposed on those found guilty of fraud?
- up to 25 years in prison
What does Section 404 of SOX require management to do?
- Report on internal control over financial reporting
How many audit opinions does Section 404 of SOX require?
two - one for internal control & another for financial statements
Are small firms exempt from dual audit requirements?
Yes
What is the market capitalization requirement to be considered a small firm?
< $75 million
Identify the nonaudit services that cannot be provided to audit clients by auditors without PACOB or audit committee preapproval
- 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
What is the waiting period requirement for employment of a former auditor?
1 year
Identify the time restrictions for audits
- 5-year lead partner rotation
- 7-year workpaper retention
- Annual inspections
Who does the Dodd - Frank Wall Street Reform and Consumer Protection Act of 2010 extend to?
- 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
What is the Financial Stability Oversight Council and what is its purpose?
- Identify financial system risks
- Comment to the SEC regarding accounting issues
- Report annually to Congress about financial market & regulatory matters
What is the capital requirement in which investmnent advisors are required to register with the state regulators?
$25 million - $100 million of assets
When might an investment advisor register with the SEC under the Dodd - Frank Act?
when the advisor is required to register with at least 15 states
How often do shareholders have a nonbinding vote on compensation for specified corproate officers under the Dodd - Frank Act?
once every 3 years
What is a clawback policy?
- policy by a public company defining how to recover performance-based executive compensation after a financial restatement
What is the SOX requirement to strengthen auditor independence?
- 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
Define aiding and abetting the Securities Exchange Act of 1934
- 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
What is the statute of limitation of a plaintiff bringing suit under the 1934 Act for aiding and abetting?
- 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
