Chapter 20 Flashcards
Common Law
Civil damages but not criminal punishment; can be punitive. Liability to clients: Due care: same degree of skill or knowledge by others in the profession held to this level.
Negligence (4 Items to Prove)
1) Auditor had a duty to perform.
2) Auditor breached that duty.
3) Connection between auditor negligence and damages.
4) Client actually suffered damages.
Contributory Negligence (All or nothing)-Client/Plaintiff vs. Firm/Defendant
If plaintiff is 1% at fault, you get NOTHING from the defendant.
Comparative Negligence (Relative fault)–Client/Plaintiff vs. Firm/Defendant
Whatever is related to you from your own negligence you can’t get, but you can get everything else.
Liability to 3rd Parties (i.e. Non-clients, typically Investors)
Negligence (must prove 4 things stated before)
Must 1st Prove Standing (4 Standards)
1) Privity.
2) Near Privity.
3) Foreseen 3rd party.
4) Reasonably Foreseeable 3rd Party.
Privity
Deals with contract. Ultramares Case: if you (plaintiff) are not a party of the contract, then you can not sue!
Near Privity
Plaintiff has to have fairly significant contact with the auditor. Almost never happens.
Foreseen 3rd Party (Restatement standard) (Most Common)
Auditor should have reasonably known that the party would see the F/S. Banks especially.
Not fair for shareholders/investors to sue them as it is not reasonable!
Reasonably Foreseeable 3rd Party
Should have been able to guess another party would use the F/S. Has not been used since 1930-NEVER used.
Fraud/Gross Negligence (Must prove 5 things)
1) False representation by the accountant.
2) Accountant knew representation was false.
3) Accountant intended 3rd party to rely on information.
4) 3rd Party did rely on the information.
5) 3rd Party suffered damages.
Compensatory Damages vs. Punitive Damages
Compensatory: puts the plaintiff back in position if this did not happen (compensate them for their loss).
Punitive: damages for outrageous conduct.
“Apportioned” vs. “Joint & Several” if more than one defendant
Apportioned: split between the defendants.
Joint and Several: one party can pay their portion of the damages, and all other parties as well.
SEC Act of 1933
Regulates disclosure of new filings.
Initial filing of securities (Issues of new stock).
Shifts burden of proof from the plaintiff to the defendant (Auditor). (S1, S2, S8)
SEC Act of 1933: Section 11
Can be sued if: 1) plaintiff suffered a loss by investing in security and 2) problem with the financials.
SEC Act of 1934
Regulates ongoing reporting or files. (10k, 8k, 10Q)
SEC Act of 1934: Section 18
Client or firm can be held liable if they make false or misleading statement in F/S.
SEC Act of 1934: Rule 10b (5) Prove 4 things: (IMPORTANT)
1) Mistake or omission in F/S.
2) Plaintiff relied on F/S.
3) Damages were suffered because of F/S.
4) “Scienter” or intent was present.
Private Securities Litigation Reform Act of 1995
1) Can have multiple defendants and 2) prohibits fishing expeditions.
Stopped the idea of looking through workpapers to find something wrong!
If you want to sue, you need to have a good idea what you want to prove!
Securities Litigation Uniform Standards Act of 1998
Can not make claims in state court that belongs in a federal court!
Sox Act of 2002: Section 302
CEO and CFO must sign off every quarter on fairness of F/S and that law and regs have been complied with. (Quarterly)
Sox Act of 2002: Section 906
Same filing at end of year. CEO and CFO signs off on whole year and 4th quarter like above!
Sox Act of 2002: Section 404
CEO, CFO, and auditor need to sign off ICFR yearly in 10K.
Foreign Corrupt Practices Act (FCPA)
Notify board of directors about bribes and foreign officials.
Ralph Lauren article! Avon Co.
Racketeer Influenced & Corrupt Organization (RICO)
If we are guilty of participating in racketeering or helping the client racketeer, we can be held for TRIPLE the damages!
