Professional and Legal Responsibilities Flashcards
Law that has historically been established by judicial precedents–the source of libability to clients and third parties (not covered by securities laws)
Common law
Failure to use even slight care–often referred to as gross negligence
Constructive fraud
Negligence on the part of the plaintiff that contributed to that party’s losses–typically mitigates some or all of the defendant’s damages
Contributory negligence
The standard of care required under filings under the SEcurties Act of 1933
Due diligence
A misrepresentation intended ot mislead another party or a reprsentation made witha reckless disregard for its truth
Fraud
A concept of liability similar to joint liability except that if all of the judgment is recovered from one defendant, that party may attempt to collect from other defendats their proportionate shares of the judgment
Joint and several liability
A joint program of the AICPA and state CPA societies to jointly investigate ethics violations
Joint Ethics Enforcement Program (JEEP)
A liablity concept in which any joint defendant may be forced to pay the entire amount of a judgment
Joint liability
Failure ot perform with the level of skill and judgment possessed by a typical professional
Negligence/ ordinary negligence
A party other than the client who primarily benefits from the contracted services provided by the CPA –has the same rights as a client under common law
Primary beneficiary (ex. a bank who requests an audit of a client company)
Communication that is not subject to disclosure in court or administrative proceedings–must be established by law, and generally the communicaiton between an accountant and a client is not privileged
Privileged communication
A mutual relationship esbalished between parties typically established by a contract
Privity
–the client and third party benefiiciares are in privity with the CPA in a contract to provide services
A nonprofit organization created by SOX to oversee the audits of public companies
PCAOB–Public Company Accounting Oversight Board
an act that seta new set of enhanced standards for public company boards, management, and public accounting firms–established the PCAOB
Public Company Accounting Reform and Investor Protection Act (SARBANES OXLEY)
An act deisgned to allow prosecution of organized criminals–can result in recovery of treble damanges–ussed to pursue CPA firms who engage in multiple instances of wrongfu acts
Racketeer Influenced and Corrupt Organization (RICO) Act
A federal securities act that covers the initial registration of securities
Securities Act of 1933
A federal securities act that covers the secondary purchase and sale of securities
Securties Exchange Act of 1934
A concept of liability in which joint defendants are responsible for only thier proportionate share of the judgment
Several Liability–the liability standard included in the UAA
State boards that regulate hte practice of public accountancy in a state or jurisdiction
State Boards of Accountancy
AICPA standards for CPAs that perform tax services for clients
Statements on Standards for Tax Services
REgulatory requirements regarding the authority to practice before the Internal REvenue Service
Treasury Department Circular 230
A federal agency wiht primary responsibility for enforcing hte federal securities laws and regulatin the securities industry
US Securities Exchange Commission (SEC)
A code of ethics applicable to all AICPA members, not just those in public practice–provides minium levels of acceptable conduct relating to all services performed by CPAs, unless wording of a standard specifically excludes some members
AICPA Code of Professional Conduct
An act developed by the AICPA to provide state jurisdictions a model act to regulate CPAs
Uniform Accountancy Act (UAA)
A senior technical committee of the AICPA that interprets and enforces the AICPA Code of Professional Conduct
Professional Ethics Executive Committee (PEEC)
Duties under a contract in which the accountant owes the duty to perform in a nonnegligent manner
Implied Duty under contract
A duty of the accountnat to perform under terms of the contract
Express duty under contract
Where all terms of a contract between a CPA and client should be explicitly recorded IN WRITING
Enagment letter
Monetary compensation awarded to an injured party that goes beyond that which is necessary to compensate the individual for losses and that is intended to punish the wrongdoer.—generally not awarded for breach of contract
Punitive damanges
damages recovered in payment for actual injury or economic loss, which does not include punitive damages (as added damages due to malicious or grossly negligent action).
Compensatory damanges
A phrase in a contract that means that performance by one party at or within the period specified in the contract is necessary to enable that party to require performance by the other party–if contracted party does not perform obligation in time period under this clause, not entitled to compensation
Time is of the essence
An act from which an injury results as a natural, direct, uninterrupted consequence and without which the injury would not have occurred.–would not have happend “but for” the acts of the defendent
Proximate cause
reckless disregard for the truth/ intent to mislead
scienter
A third party who the accountant knew would rely on finanical statements or a member of a limited class that the accountant knew would rely on financial statements for a specified transaction
Foreseen party—a bank is a forseen party if the CPA firm knew that the audit was to secure a loan with some bank
Rule that says that accountants are liable to forseen third parties for ordinary negligence–accountant liable for fraud, constructive fraud, or gross negligence
Majority rule
Any party that an accountant could reasonable forsee would receive finanical statemnts and use them–accountnats not liable to these parties for negligence
Forseeable parties–majority rule
Under this doctrine, an accountant is liable only for negligence to third parties who are in privity of contract –minority rule
Ultramares doctrine
A review of financial statements subsequent to the balance sheet date
S-1 Review–can still be liable under the Securites Exchange Act of 1933
Rule making it unlawful to employ any device, scheme or artifice to defraud (2) make untrue statement of material fact or omit material fact (3) engage in act, practice, or course of business to commit fraud or deceit in connection with purchase or sale of security
Section 10b-5 of Securities Exchange Act of 1934
Rule making it unlawful to make false or misleading statements with respect o a material statemnt unless done in “good faith”
Section 18 of Securities Exchange Act of 1934
Evidence, notes, computations, etc. that the accountant accumulates when doing pofessional work for a client-owned by the accountant unless there is agreement to the contrary
Working papers
The Financial Privacy Rule requires financial institutions to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter. The privacy notice must explain the information collected about the consumer, where that information is shared, how that information is used, and how that information is protected.
Gramm-Leach Bliley (financial Moderniation) Act of 1999
Under this act, plaintiffs need more proof of fraud before they can initiate a suit. This makes it very difficult to file a frivolous suit, but it also makes it much harder to file legitimate ones, as plaintiffs are forced to present evidence of fraud before any pretrial discovery has taken place–designed to make it harder to file frivolous law suits against accountants–amends the Federal Securities Act of 1933 and the Federal Securities Exchange Act of 1934
Private Securities Litigation Reform Act (PSLRA)
Other name for Sarbanes-Oxley
Public Company Accounting Reform and Investor Protection Act
The act that established the PCAOB
Sarbanes-Oxley
A nonprofit corporation, consisting of 5 members (2 CPAs, 3 not) that regulate firms that audit SEC registrants (public companies)
Public Company Accounting Oversight Board (PCAOB)
This must be filed with the SEC within 4 days of the occurrence of a triggering event
Form 8-K
An individual who prepares for compensation, or who employs one or more persons to prepare for compensation, any federal tax return, or a substnatial portion thereof, including income, employment, excise, exempt organization, gift, and estate tax returns
Preparer
Standard of success that a CPA can use to make decisiosn in preparing a tax return to requires one-third likelihood of success
Realistic Possibility of success standard
A success standard that a CPA may use in making decisions in preparing tax returns that requires more than 50% probability of success
More Likely Than Not Standard
written advice, including electronic communications (i.e., e-mail, faxes), on a federal tax issue arising from an arrangement in which the principal purpose of thetransaction is tax avoidance, or a significant purpose
Circular 230 covered opinion
Written advice that advises a taxpayer that he has a 50 percent chance of favorably resolving tax issues.
Circular 230 reliance opinion
A document established by the US Treasury department that prohibts written advice that advises tax avoidance or a reliance opinion
Circular 230
A position in which there is at least a 20% probability of being sustained on its merits
REasonable basis position
Applies if there was a material misstatement due to a tax preparer relying in good faith on he advice of an adisory preparer who the return preparer had reason to believe was competent to render such advise
REasonable cause and good faith exception—IRS reviews the facts and circumstances in these cases ato determine whether this exception applies
