Exam II Flashcards
What is the standard of evidence in a civil liability case?
Preponderance of the evidence (which essentially means that it was more likely than not that something occurred in a certain way)
What is the standard of evidence in a criminal case?
Beyond a reasonable doubt
What sources of law can the plaintiff sue under in a civil liability case?
- Common law
- Statutory law
What is common law?
- Written opinions of prior courts within a state (called legal precedent)
- Each state has its own common law
What is statutory law?
- Written, legislated
- Refers to written statutes established by Congress at the federal level and by state legislatures at the state level
Are more cases tried under SA ‘33 or SEA ‘34?
SEA ‘34 (Securities Exchange Act of 1934)
What four potential parties can sue under common law?
(1) Client (management of company)
(2) 3rd Party Primary Beneficiary
(3) 3rd Party Foreseen Beneficiary
(4) Foreseeable 3rd Party
What are three sources of potential liability for an auditor? Expand.
(1) Ordinary negligence (lack of reasonable care)
(2) Gross negligence (lack of even min. care)
(3) Fraud (intentional misrepresentation of material fact)
Give an example of ordinary negligence.
Violate GAAP/GAAS
Give an example of gross negligence.
- Reckless departure from GAAP/GAAS
- Audit staff checks off procedures he/she didn’t actually do
- Audit partner moves work down the line to save on costs but staff not experienced enough to do it right
Give an example of fraud.
Deceive user of F/S, and as a result they suffer financial damage.
What are the two ways fraud plays out in practice? Give an example for each.
(1) “Aiding and abetting” - Global Crossings - capacity swaps perpetrated by the independent auditors
(2) “Knew or should’ve known” - Sunbeam - auditors knew about channel stuffing and bill and hold - auditors should’ve known have restructuring accruals
What does burden of proof vary by?
- By Source of Law
- By Jurisidiction
What is the auditor’s primary defense to the deficient conduct argument?
Due Diligence Defense
What are the names of the three key criminal liability cases?
1) National Student Marketing (US v. Natelli)
2) ESM Government Securities (ESM v. Alex Grant Co.)
3) US vs. Arthur Andersen
What happened in the criminal National Student Marketing case (co. wrongdoing; auditor conviction)?
- Co. overstated A/R and revenues (did so by hiring college students to stuff mailboxes with consumer products with order form; students received huge discounts if they used order forms; but co. significantly overstated #order forms actually executed)
- Auditor convicted for criminal liability for certifying Nat’l Student Marketing Co. financial statements with material A/R disclosure omisions
What happened in the criminal ESM v. Alexander Grant Co. case (co. wrongdoing; auditor conviction)?
- Co. repeatedly resold same block of securities
- Co. told AG partner about a fraud the prior year and partner agreed to say nothing for $100,000
- Partner was sentenced to 12 years in prison when this was uncovered
Why did the USA v. AA case become criminal?
- DOJ won case from SEC
- Became criminal b/c AA announced “doc shredding” and AA had entered into a consent decree with the SEC after Waste Management to “not violate laws anymore”
Under common law, who does the burden of proof fall on?
- Plaintiff (needs to prove damage or loss, misstated F/S, reliance on F/S, deficient auditor conduct)
Under common law, what is the auditor’s minimum basis for liability to the client?
- Ordinary negligence
Under common law, what is the auditor’s minimum basis for liability to the primary beneficiary?
- Ordinary negligence
Under common law, what is the auditor’s minimum basis for liability to foreseen third parties
- Restatement of Torts v. NY Rule
Under common law, what is the auditor’s minimum basis for liability to foreseeable third parties?
- Fraud (majority view)
- Ordinary neg. (minority view in Mississippi and Wisconsin)
What is the distinction among “restatement-majority,” “restatement-minority,” and “credit alliance” states?
- Majority states: requires that auditor knew recipient would “use” report to influence plaintiff
- Minority states: adds that auditor knew recipient would “rely” on report
- Credit Alliance states: adds that evidence “links” the auditor and plaintif