CHAPTER C Flashcards
sources of auditor liabilities
common law and statutory liability
Types of third parties
- primary beneficiaries
- foreseen third parties
- foreseeable third parties
Primary beneficiaries
Third parties that are known by name to the auditor
- The auditor knows that a certain company is going to rely on the financial statements and the auditor’s opinion
foreseen third parties
Auditors know about the third party but without a specific name
- They know the bank is going to use the financial statements to make a lending decision but u don’t know which bank it is
foreseeable third parties
Anybody who would normally rely on the financial statements
- They just assume that banks rely on financial statements as do investors
gross negligence
Lack of minimum care, the auditor doesn’t even try to do it right
Extreme case of negligence, or there’s participation in the fraud by auditors.
- If this happens, they are reliable to all third parties.
common law
Law that comes from court cases over the years
components of common law
breach of contract
tort liability
statutory law
Liability that comes from statutes or laws that are passed
two statutes for public clients in statutory law
Securities act of 1933
Securities exchange act of 1934
Securities act
Regulates initial issuance of securities and requires registrants to provide registration statement (including financial statements)
Securities exchange act
Regulates daily trading of securities and requires periodic financial statements and information to be filed with the SEC.
Under the ______, auditors are liable for ordinary negligence.
- They are also liable for gross negligence and fraud.
- Burden of proof is on the auditors.
Securities Act
Under the __________, auditors are liable for gross negligence and fraud.
- NOT ordinary negligence.
- Burden of proof is on the plaintiffs (party who initiated lawsuit),
they have to show a loss and that the financial statements contained a misstatement, and that the auditors were aware of the misstatement or exercised gross negligence (which is very hard to do)
Securities Exchange Act
Under the _______, auditors defend themselves by proving they did a good audit or that the plaintiff’s loss was caused by something else.
Securities Act
Under the ________, auditors defend themselves by showing that they acted in good faith, which means they did a good audit and they were not aware of the misstatement.
Securities Exchange Act
this act:
- Expanded liability
- Increased the statute of limitations and increased penalties
Sarbanes Oxley Act
this act:
- Reduced liability
- Established a standard of proportionate liability instead of joint and several liability.
- The way this works is that the judge will assign blame during the lawsuit.
Private securities litigation reform act
this act:
- Reduced liability
- Moved lawsuits from states to the federal courts where there are more resources and less local favoritism.
Securities litigation uniform standard &
Class action fairness act
ordinary negligence
a lack of reasonable care
auditors making a mistake or trying to follow auditing standards but falling short
fraud
exists when the auditor knows the financial statements are incorrect but gives an Unqualified opinion anyways
why do auditors prefer proportionate liability standards to joint and several liability standards?
the maximum payout for auditors is generally much lower under proportionate standards
auditors stand a greater chance of going bankrupt under joint and several standards
joint and several standards may require auditors to pay the liabilities of all other parties
