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law Flashcards

1
Q

What is Agency Law?

A

Agency Law deals with someone’s ability to bind you to a contract with a third party

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2
Q

What is required for Agency to exist?

A

Both parties must consent to the relationship and intend for an Agency relationship to exist

Agent owes Principal fiduciary duty

Principal doesn’t owe Agent fiduciary duty

A contract is NOT required and an Agency agreement is not based on Contract Law; Exception - If duties cannot be performed within a year; a signed writing is required

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3
Q

What is Actual Authority in an agency?

A

Actual Authority is what is expressly granted or is implied by the duties you expect the Agent to perform and is necessary to carry them out

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4
Q

What is Implied Authority in an agency?

A

When authority is expressly granted; it is implied that the agent has the authority to carry out the duties

Does not include authority to sell or alter a business

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5
Q

What is Apparent (Ostensible) Authority in an agency?

A

Apparent Authority is based on the third party’s perspective - they believe that the Agent has the
authority to enter into a contract based on:

  • Prior dealings with agent
  • Agent’s title leads the third party to believe they can enter into a contract
  • The Principal hires the Agent to carry out duties that normally carry with them the rights to enter into contracts
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6
Q

How is an Agency terminated?

A
  • Both Agent and Principal agree to terminate
  • Principal fires Agent
  • Agent fires Principal
  • Agent breaches their contract by doing something like violating their obligation to act as a fiduciary to Principal
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7
Q

How do you terminate Apparent Authority?

A
  • Let the public know
  • Let the people or entities that the Agent previously interacted with know
  • In cases of death; or Principal is otherwise not competent to contract; ALL authority is revoked
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8
Q

What is an Agency Coupled with an Interest?

A

Agent acquires an ownership interest in the Agency

Can only be terminated early (before the interest expiration date) by the Agent

Unless the Agency has a specific time limit spelled out in a contract; the Agent’s authority is irrevocable
by the Principal

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9
Q

When is an employee an Agent; and when does this make the employer liable?

A

Employees are agents while acting within the scope of their duties.

For employees who injure third parties while acting within the scope of their duties; both Employee and Employer are liable

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10
Q

When are Agents liable for torts (civil wrongs) they commit?

A

Agents are liable for torts (civil wrongs) committed whether they had authority or not

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11
Q

Are Agents who act outside of their authority liable?

A

Agents who act outside of their authority will be liable for the act

Exception - Principal ratifies the contract which relieves Agent of liability

In order to ratify; Principal must know all of the facts and must ratify before third party cancels agreement

If Principal keeps the benefits of the contract; ratification is implied

Contract must be 100% ratified or there is no contract

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12
Q

What is an Agent’s liability when acting for an undisclosed principle?

A
  • Agent liable to third party even if acting within authority
  • Third party can sue both Principal and Agent if Principal becomes disclosed
  • Agent can then sue Principal
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13
Q

What are the requirements for a Power of Attorney (POA)?

A

Must be in writing

Must be signed by person granting the POA

Ends upon death of Principal

General POA - Agent authorized to handle all affairs

Special POA - Agent authorized to handle only specific affairs

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14
Q

What are the basic actions that occur in a bankruptcy?

A

Bankruptcy gives creditors protection from their creditors and stops them from either permanently (Chapter 7) or temporarily (Chapter 11 or 13) collecting a debt. The filing halts collection activity; grants automatic stay (with certain exceptions), and stops creditors from suing debtor.

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15
Q

For what debts does bankruptcy NOT stop collections?

A 
Student Loans
Income taxes from previous 3 years
Alimony & Child Support
Debts/judgements resulting from drunk driving
Pension obligations
Debts relating to SOX violations
Debts arising from illegal activities
Debts not listed in the bankruptcy filing
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16
Q

How does bankruptcy of a corporation affect the owner’s ability to file bankruptcy?

A

It doesn’t; because the corporation is a separate legal entity.

Under bankruptcy; corporations are dissolved

Under bankruptcy; individuals are discharged

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17
Q

What key action will cause a bankruptcy discharge to be denied?

A

If a debtor fails to keep good records or falsifies documents; a discharge will be denied

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18
Q

What are the basic characteristics of a Chapter 7 bankruptcy (liquidation)?

A

Discharges all non-exempt debt

Can only be filed every 8 years from previous Chapter 7 filing

Voluntary or involuntary filing

Certain businesses are disallowed from Chapter 7 bankruptcies - Railroads; Banks; Insurance companies; Savings & loans (think: 7th inning RBIs)

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19
Q

What are the requirements for a voluntary bankruptcy filing under Chapter 7?

A

Must pass means test

Your income must be below the median income for your state (Note - median; i.e. middle; not mean; i.e. average)

Credit card companies made it harder for people to declare Chapter 7 when they lobbied Congress in 2005

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20
Q

What are the requirements for an involuntary bankruptcy filing under Chapter 7?

A

In some cases; your creditors can force you into Chapter 7 or Chapter 11 BK

Creditors must be able to prove that they are not being paid on time (i.e. debtor is insolvent) or that within the past 120 days the debtor assigned a custodian of the secured property

If 12+ unsecured creditors - at least 3 must file; claims must be in excess of $15325

If less than 12 unsecured creditors - only 1 must file; claim(s) must be in excess of $15325

Upon filing; a judge will declare an order for relief unless the debtor protests

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21
Q

What entities are disallowed from involuntary Chapter 7 bankruptcy filings?

A

Charities

Farms

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22
Q

How can a debtor reclaim possession of their property from the interim bankruptcy under Chapter 7?

A

If the debtor pays the court-assigned bond to keep a property in an involuntary BK; they can
reclaim possession of their property from the interim BK trustee

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23
Q

What are the basic characteristics of a Chapter 11 bankruptcy (business repayment) filing?

A

Allows a business a reprieve from creditors
Creates a payment plan for the debt
Business remains in operation
At least 2/3 of each debt class of creditors must consent to reorganization
Ch. 11 Involuntary petitions are allowed

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24
Q

What are the basic characteristics of a Chapter 13 bankruptcy (personal repayment) filing?

A

Similar to Chapter 11; but for individuals

Gives individuals a reprieve from creditors

Creates a payment plan for the debt

Ch. 13 Involuntary petitions are not allowed

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25
Q

What are the duties and abilities of a bankruptcy trustee?

A

Represents the bankruptcy estate

Can sue or be sued

Oversees bankruptcy and watches for preferential creditor payments

Oversees priority transfer of assets to creditors

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26
Q

How and when is a bankruptcy trustee appointed?

A

Optional - Creditors decide

Can be elected by creditors or can be appointed by the court

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27
Q

What actions can a bankruptcy trustee take with respect to preferential creditor payments in a bankruptcy?

A

Trustee can void payments on antecedent (past) debts that occur within 90 days of a BK filing

A Trustee cannot void a payment made to a creditor that is an even swap (contemporaneous exchange) and for new value

A voidable preference must be on an old debt where the debtor is basically picking and choosing which creditors they send money to (AKA a voidable preference)

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28
Q

When can preferential transfers be voided by a bankruptcy (BK) trustee?

A

Made within One Year of BK to insider - Corporate officers/directors; Partners; Relatives

Made within 3 Months of BK non-insider

Creditor receives larger payment than BK liquidation would have granted

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29
Q

What is the treatment of a secured creditor in a bankruptcy?

A

Superior to claims of other types of creditors

Can take either collateral or cash proceeds from the sale of an asset

If collateral doesn’t satisfy amount owed; Secured Creditors become a general creditor for the difference.

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30
Q

What is the order of priority given to unsecured creditors in a bankruptcy?

A
  1. Court Costs and Fees
  2. Child Support & Alimony
  3. Expenses from ordinary course of business during bankruptcy proceedings
  4. Wages owed to employees
  5. Retirement contributions within last 6 months
  6. Consumer deposits for undelivered goods
  7. Taxes
  8. Other general unsecured claims
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31
Q

What are key aspects of a bankruptcy involving a landlord or leases under Chapter 7?

A

The bankruptcy trustee can act in the best interest of the creditors and assign the leases under contract to the creditors

The trustee has 60 days to assume leases on equipment after bankruptcy is granted or the leases will be rejected

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32
Q

What is the bankruptcy estate?

A

The pool of assets available to creditors until liquidation

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33
Q

What assets are exempt from creditors in a bankruptcy estate?

A

Social security

Disability payments

Unemployment; Child Support; Alimony; Wages; Pensions; Annuities to the extent that they provide reasonable support for debtor and dependents

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34
Q

How long after a Chapter 7 bankruptcy filing can creditors claim inheritance or insurance payments for repayment?

A

Inheritance/Insurance payments received within 180 days of filing for a Chapter 7 bankruptcy become part of the BK Estate

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35
Q

What is a garnishment with respect to a bankruptcy?

A

Court allows a creditor to garnish or take a portion of the debtor’s paycheck

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36
Q

What is a mechanics lien?

A

Lien on real property to secure payment for a repair/improvement done to the house

A contractor builds an addition to your house and you won’t pay. They can’t repo your house; so they get a Mechanics Lien that sticks until you sell your house and they get paid

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37
Q

What is an artisan’s lien?

A

Applies to personal property like a car

If the dealership does $500 in repairs to your car; you don’t get the car back until you pay

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38
Q

What is a surety (co-signing)?

A

A third party agrees to be liable for a loan

Example: A parent co-signs on their child’s car loan

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39
Q

How is a surety liable in a transaction?

A

A surety is primarily liable

Surety can be released from liability if the creditor behaves in a way that increases the risk that they
initially agreed to

Surety can be released from liability if the debtor changes the loan agreement in a way that materially
increases the surety’s risk

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40
Q

What is a cosurety; and how are they liable in a transaction?

A

Two sureties are guaranteeing the same debt

Proportionately liable - If one cosurety is released from their obligation; then the remaining cosureties
have their proportionate share reduced by the released party’s percentage

If one surety pays more than their proportionate share of the risk; then the other sureties must compensate them for the difference; which is called Right of Contribution

41
Q

What is a guarantor?

A

Similar to surety; but a guarantor is secondarily liable

42
Q

What are the basic rights of a debtor under the Fair Debt Collection Practices Act?

A

Basically - your creditors have the right to collect from you; but not abuse you or embarrass you

The can’t contact you once you’re represented by an attorney

They can call other people to find out where you are; but they cannot identify themselves as collectors

They must stop calling you at work if you send them a certified letter that says my employer doesn’t allow me to take calls at work.

They must call you only at reasonable hours of the day - according to your time zone; not theirs

43
Q

What is considered the biggest change to financial regulation since the Great Depression of the 1930s?

A

The Dodd-Frank Wall Street Reform Act of 2010

44
Q

What is the goal of the Volcker Rule?

A

Banking Institutions maintain healthy capitalization ratios

45
Q

How does the Volcker Rule limit banking institutions?

A

Limits banking institutions from owning more than 3% of a hedge fund’s total ownership interest

Limits banking institutions from owning interests in hedge funds that exceed 3% of their Tier 1 Capital (Common Stock + Retained Earnings + non-redeemable; non-cumulative Preferred Stock)

46
Q

What does the Volcker Rule require banking institutions to disclose?

A

Relationships with hedge funds must be fully disclosed to regulators

47
Q

Describe the Federal Unemployment Tax Act

A

An employer-paid tax. Must file return and pay even if only one employee works there. Deductible to company - Not deductible by the employee. Allows employers to credit the FUTA liability by the amount of State Unemployment Tax (SUTA) they pay.

48
Q

What are the major aspects of FICA and Social Security taxes?

A

Paid by Employer AND Employee - Employer withholds from employee’s paycheck and must pay tax matching employee’s withholding

If employer under-withholds; they are required to make up the difference

Self-employed individuals must pay both the employer and the employee share; which is Self Employment Tax

People drawing Social Security may have their benefits reduced if they go back to work and earn an income

49
Q

When is an employee covered by Workman’s Compensation?

A

Employees injured on the job get protection; even if they messed up and caused the injury themselves

Exception: If the employee intentionally harmed themselves; there is no Workman’s Compensation

50
Q

What age group is protected under Age Discrimination Laws?

A

They protect people ages 40 and above at companies where at least 20 people are employed

51
Q

What are the tenets of the Occupational Safety and Health Act (OSHA)?

A

Employers should promote a safe workplace and environment for their employees to work in

Injury records must be kept
Penalties can be both
o Civil - $1;000 fine per day
o Criminal - Could include imprisonment

Employer can require a search warrant for OSHA to investigate their facilities

52
Q

What types of discrimination are prohibited for employers based on civil rights laws?

A

Sex

Race

Religion

National Origin

53
Q

What are the powers granted under the Environmental Protection Act?

A

EPA has the power to assess civil penalties for violating environmental laws like the Clean Air Act
The EPA can sue violators
Citizens can sue violators
States can sue violators
Citizens can even sue the EPA to force enforcement
For hazardous waste sites: owners; operators; transporters; and lenders associated with the site can
be held liable

54
Q

What are the key points of the 1933 Securities Act?

A

Governs Initial Public Offerings (not subsequent sales). Covers registration statements and accompanying information filed with SEC. Information must include audited financial statements & a prospectus. Note: Even if a company is exempt from registering under the 1934 Act; they still must adhere to the anti-fraud provisions of the Act

55
Q

What entities are exempt from filing registration statements under the 1933 Securities Act?

A

Banks; Commercial Paper; Farmers; Co-ops; Charities; Governments

Also exempt: Securities sold in ONE state; where investors are residents; 80% of business done in one state; and resales can’t occur within 9 months to interstate parties.

56
Q

What are the key points of the 1933 Securities Act; Regulation A?

A

Issuer can issue $50M of securities per year and be exempt if they file a notice with the SEC

Non-issuers (AKA a private individual) can sell $1.5M per year and be exempt

57
Q

Under the 1933 Securities Act; Regulation D; what are Rules 504; 505 and 506?

A

Rule 504- Max Amount per year: $1M; Max Investors: Unlimited

Rule 505 - Max Amount per year: $5M; Max Investors: 35 Unaccredited or Unlimited Accredited

Rule 506 - Max Amount per year: Unlimited; Same as 505; but Unaccredited investors must be sophisticated

58
Q

What are the registration form options under the 1933 Securities Act?

A

S-1 - Long Form or

S-2 and S-3 - Less Detailed and preferred by issuers

59
Q

Name the securities registered under the Securities Act of 1933.

A 
Stocks
Stock Options
Stock Warrants
Limited Partnership Interests - General Partnerships not allowed
Bonds
60
Q

Who can sue under the Securities Act of 1933?

A

Purchasers of securities only

61
Q

Name the Requirements for Accountant to be liable under the Securities Act of 1933.

A

Damages & Material Misstatements Only

o Reliance on financial statements are not a requirement unless purchased more than a year after the security is registered

Proving negligence is not a requirement

62
Q

Name the Defenses of an Accountant under the Securities Act of 1933.

A

Accountant used Due Diligence

Accountant followed GAAS

Damages weren’t caused by accountant’s work

Plaintiff knew of the material misstatements

63
Q

What does the Securities Act of 1934 govern?

A

The trading/selling of securities after the IPO

64
Q

What reports must be filed under the Securities Act of 1934?

A

Form 10-K Annual Report - Must be audited

Form 10-Q Quarterly Report - Must be reviewed; but not audited

Form 8-K - A notice of a material event; Must be filed within 4 days of event

65
Q

Who can sue under the Securities Act of 1934?

A

Purchases and Sellers of Securities

66
Q

Name the Requirements for an Accountant to be liable for fraud under the Securities Act of 1934.

A

Damages

Material Misstatements

Reliance on financial statements

Scienter or reckless disregard for the truth

67
Q

What procedures must an Accountant have in place under the Securities Act of 1934?

A

Accountant must have procedures in place to:
Determine if Going Concern is an issue
Determine if any material related party transactions occurred

Determine if material illegal acts occurred

68
Q

Insider trading rules under the Securities Act of 1934 apply to which individuals?

A

Officers; Directors and 10% Owners

69
Q

What are the Proxy Solicitation Requirements under the Securities Act of 1934?

A

Proxy must give shareholders audited balance sheets from 2 most recent years

o Requirement holds true even if one class of stock

70
Q

What is the revenue limit for an Emerging Growth Company IPO?

A

$1 Billion

71
Q

For an Emerging Growth Company IPO, how many years of audited financial statements are required?

A

2 years

72
Q

How did Reg D, Rule 506 change under the JOBS Act?

A

General Solicitation and Advertising now allowed

73
Q

Under the JOBS Act, what is the capital ceiling under Regulation A?

A

Reg. A Capital ceiling raised from $5M to $50M

74
Q

Under the JOBS Act Title V - Private Company Flexibility and Growth, what is the shareholder limit if there are less than 500 non-accredited shareholders?

A

2,000

75
Q

What is the purpose of a Consulting Engagement?

A

This engagement helps the client be more efficient with personnel and resources in order to accomplish their goals.

76
Q

What is required by the Statements on Standards for Consulting Services (SSCS)?

A

Competence; Due Professional Care; Planning; Supervision; Obtain Sufficient Data; Serve Client Interest; Agreement: Written or Oral; Communicate w/ Client; Objectivity

NOT REQUIRED: Independence

77
Q

What is the difference between Express versus Implied duties of an accountant under contract?

A

Express: Contract specifies what accountant will do

Implied: Accountant performs without negligence

78
Q

Accountant’s liability for negligence - What are the requirements?

A

DUTY - DAMAGES - RESULT

Duty - Accountant must have had duty to perform with due care exercised by an average accountant.

Damages - The client experienced actual damages.

Result/Causation - The damages were as a result of the negligence.

79
Q

What is an Accountant’s Liability for Detecting Fraud
(Under Normal Circumstances)?

A

It is not the accountant’s job to find fraud and they are not normally liable for not detecting it

80
Q

When can a client be sued for failing to detect fraud?

A

When a normal audit following GAAS would have detected the fraud.

When an accountant agrees to take on more responsibility than what is required under a normal audit.

When accountant words the audit report to indicate this greater responsibility.

81
Q

When has an accountant committed fraud?

A

Misrepresentation - Accountant misrepresents MATERIAL fact(s)

Scienter - Accountant commits scienter

Damages - Client has actual damages.

Reasonable Reliance - Client reasonably relied on the misinformation.

82
Q

What is Scienter?

A

To report something knowing it is false.

Characterized by reckless disregard for truth

Intentionally conceal facts

83
Q

What is the Accountant’s Liability to Third Parties - Privity Defense?

A

Lack of privity defends against contract breach and negligence.

NOT a defense against fraud.

84
Q

The definition of Ultramares Decision:

A

Accountants are not liable to third parties unless the third party was an
intended beneficiary of the engagement AND the accountant knew they
would be relying on the financial statements.

85
Q

What is Common Law Fraud?

A

Regular fraud

Misrepresentation of Material Fact
Scienter
Damages
Reasonable Reliance

86
Q

What is Constructive Fraud?

A

Gross Negligence - reckless disregard for truth

CPAs usually not liable for simple negligence; but Gross Negligence (aka Constructive Fraud) opens the CPA up to be liable to third parties.

87
Q

What are the required actions with Discovery of Illegal Activity?

A

Accountant must report discovered illegal activity to Audit Committee or Board of Directors

If material in public company; BOD has 1 DAY to notify SEC.

88
Q

What is the Accountant-Client Privilege?

A

NO Federal Accountant-Client privilege for non-disclosure of private
conversations to a court unless a particular state recognizes such a privilege.

If your client tells you Yeah; I cheated on my taxes; a court could force an accountant to testify about that conversation.

89
Q

Accountant’s Workpapers - Confidentiality Requirements

A
  1. Can be subpoenaed
  2. Can be looked at by another CPA doing peer review
  3. Property of the accountant who created them

Note: Source documents supplied by client must be returned to client if they request them back; even if there is a billing dispute.

90
Q

True or False: Accountants are responsible for knowing the personal finances of tax preparation clients.

A

Accountants have no way of auditing individual’s personal finances and are not required to do so when preparing a return

91
Q

When a past error is found in a client’s tax return; what should an accountant do?

A

If a past error is found; accountant should inform client of this error.

Contacting the IRS is NOT required.

If client won’t fix it; then the accountant should reconsider whether they want to do business with the client

92
Q

Name the key responsibilities of an accountant when preparing a tax return.

A

Accountant must prepare the return in good faith and ask for more information if something is missing

When recommending a tax position; the accountant should realistically believe that it would stand up under the scrutiny of a court

93
Q

When does a security interest attach; or become legally enforceable?

A

Secured interest must be supported by consideration given. Debtor must actually own the rights to the collateral or have possession. Secured interest much be recorded

94
Q

What are the characteristics of perfection of interest in a secured transaction?

A

Gets higher priority over others claiming rights to collateral after the perfection takes place

Attachment must take place BEFORE perfection

95
Q

How does perfection occur in a secured transaction?

A

By filing a financing statement

By possessing the collateral

96
Q

When does automatic perfection occur in a secured transaction?

A

Store sells a consumer good on credit - Store retains security interest

A bank finances the purchase of a consumer good - Bank retains security interest

97
Q

What are the priority rules for payment in a secured transaction?

A

If two parties are perfected; then the first one to file wins

If neither party is perfected; then the first one to attach wins

98
Q

What are the advantages of a creditor holding a lien in a secured transaction?

A

Creditor holds priority over claims to collateral vs. unperfected security interests

Beats perfected security interests filed after lien attachment

Exceptions: Purchase money security interest; which has a 10 day grace period to be filed

Buyers purchasing in the ordinary course of business are immune from security interests held by merchants

REG (9 decks)

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