Chapter 29 - Accounting Regulation

Question 1

Sarbanes Oxley Act of 2002

Answer 1

• Came about because of the Enron Scandal.
• Auditors were consulting Enron and represented to the public that their financial statements were in compliance with GAAP although they knew they weren’t.
• Applies to publicly traded companies.

Question 2

Sarbanes Oxley Act of 2002 Rules

Answer 2

1. Creation of the PCAOB (public company accounting oversight board).
2. Registration of public accounting firms with the PCAOB (accounting firms that audit public companies must register).
3. Deals with conflicts of interest
4. Corporate responsibility for financial reports.

Question 3

SOX and conflicts of interest

Answer 3

• Restrictions on other services that auditors can provide.

- Audit partner must rotate off the engagement every 5 years.

Question 4

SOX and Corporate responsibility for financial reports

Answer 4

1. Officers must “sign off” on the auditor report and financial statements.
2. Public companies must set up an audit committee who approves different auditing things.
3. Company must disclose whether a code of ethics exists for officers.

Question 5

Civil Liability of Accountants - TO CLIENTS

Answer 5

Beware of:

1. Negligence (duty of care, breach, cause, damages = tort)
2. Breach of Contract (fails to perform)
3. Fraud (intent to deceive)

Question 6

Civil Liability of Accountants - TO 3rd PARTIES - ULTRAMARES APPROACH

Answer 6

• Depends on which state you live in.
• I as the accountant/auditor knew when I was doing the work that the 3rd party would rely on it.
• Narrow

Question 7

Liability to 3rd Parties - RESTATEMENT APPROACH

Answer 7

• In between

- Accountant could be liable to a broader class of 3rd parties.

Question 8

Liability to 3rd Parties - FORESEEABILITY STANDARD

Answer 8

• Very broad

- Liable to any foreseeable 3rd party (ie investors) that may use and rely upon reports.

Question 9

New Mexico State Investment Council v. Ernst and Young LLP

Answer 9

1. E & Y was the auditor for Broadcom.
2. Broadcom had back dated some stock options.
3. E & Y audited them and gave Broadcom a clean/unqualified opinion.
4. E & Y was sued by NM gov’t for failure to discover back-dating.
5. E & Y won at trial level but on appeal they lost because the court found that E & Y had SCIENTER (state of mind).

Question 10

Criminal Liability of Accountants

Answer 10

Stay out of trouble:

1. Under securities law.
2. Under tax law
3. Under general criminal laws.