Professional Responsibilities Flashcards
What are the 4 requirements a plantiff must prove to sue an accountant? (Accountant Liability)
“MILE”
M- Material misstatement (or omission of a material fact)
I - Information must have been relied on by the plaintiff
L - Loss (financial) must have occurred
E - Error was made by the accountant
What are the 4 requirements a plantiff must prove to sue an accountant for “negligence”?
“MIL-E”
M- Material misstatement (or omission of a material fact)
I - Information must have been relied on by the plaintiff
L - Loss (financial) must have occurred
E - No due professional care (NEGligent): Nondisclosure of information to client; Errors previously discovered and not corrected, GAAS/GAAP was NOT followed
What must a plantiff prove to be successful in a case based on negligence?
“CAMPS”
- Casual relationship (behavior of accountant caused it)
- Absence of Due Care (careless auditor)
- Material Misstatement
- Privity or equivalent (allowed to sue)
- Suffered financial loss
Two forms of fraud:
Actual Fraud - making false statements with knowledge of their falsity
Constructive Fraud (Gross Negligence) - making false statements with disregard for truth (no knowledge on if true or false)
What must a platiff prove to be successful in a case based on fraud?
“RIMS”
- Reliance (plantiff relied on F/S)
- Intent to deceive (auditor had knowledge that opinion was inappropriate)
- Material Misstatement
- Suffered financial loss
Securities Act of 1933
Law that requires the audited F/S to be included in the prospectus and registration statement required when public offers fall within the law
Securities Act of 1933 Section 11
Makes anyone who signs a registration statement liable for all damages caused by any misstatement of material fact in the registration statement
What must a plantiff prove to file a case under the Securities Act of 1933 - Section 11?
“SAM”
- Suffered Loss (must have sustained a loss in connection with their purchase of securities)
- Audited F/S must have been included in the prospectus provided to plantiff
- Material misstatement/Misrep of Facts
- No obligation to prove reliance
- No privity requirement
To avoid liability under Securities Act of 1933 and 1934 Act, an auditor must prove what?
“DK”
- Due diligence was conducted (in conformity with GAAS)
- Knowledge of plantiff (plantiff knew of the misstatements before making the purchase)
Securities Exchange Act of 1934
All audits of companies involved in interstate commerce are covered by the Securities Exchange Act of 1934
What is the difference between common law fraud and fraud under the Rule 10(b)5 of the 1934 Act?
Common law fraud cases are heard in state court, and 1934 fraud is heard in a federal court
Common law “fraud”
1934 Act “scienter”
What must a plantiff prove in a liability under the 1934 Act?
MILE (Identical to common law fraud)
1995 Private Securities Litigation Reform Act
CPA must follow when auditing publicly traded companies that report to the SEC under the 1934 Act. Additional responsibilities are added to the code.
What are the additional responsbilities added to the code under the 1995 Private Securities Litigation Reform Act?
Identify:
- Illegal Acts, including management fraud
- Significant related party transactions
- Substantial doubt related to continue as a going concern
How many days before the board must file information to the SEC related to fraud?
1 Day; if auditor doesn’t receive proof of this, auditor is given one day to 1) resign from engagement; 2) notify SEC of failure
Responsibilities under the SOX Act for audits of public companies?
- maintain workpapers for 7 years
- it is considered a felony to destroy or create documents
- statute of limitations on securities fraud claims is extended to 5 years
- Employees of CPA firms are extended whistleblower protection (also remedy of special damages and attorney fees)
- Securities fraud by CPAs is punishable up to 10 years
A penalty may be assessed by the IRS against a federal income tax preparer who:
- Fails to sign the return and provide the appropriate federal ID #
- Fails to provide a copy of the return to the client and retain a copy for the time specified by law
- Negotiates or endorses a client’s tax refund check
Exceptions to the confidentiality requirement of an accountant:
- Valid subponea
- Court order
- Quality control peer review
- Where disclosure is in compliance with GAAP or GAAS
Statements on Responsibilities in Tax Practice state a member in the performance of tax services may:
“RAMEN”
- Rely on info provided by a client without verification unless it is clearly incorrect or incomplete
- A tax position that lacks merit may not be recommended
- Must make a reasonable effort to answer applicable questions on the return
- Estimates may be used
- No fee based on results
Who may represent the taxpayer before appeals offices?
Any individual who prepares and signs a return as a preparer may represent the taxpayer before appeals offices
When does accountant-client privilege exist?
Where a state statute has been enacted creating such a privilege because the accountant-client privilege does not exist at common law and thus must be enacted by state statute in order to exist.
What is the statute of limitations of the Securities Exchange Act of 1933 Section 11?
1 year from the discovery of the omission and 3 years from the offering date
Which of the professional bodies has the authority to revoke a CPA’s license to practice public accounting?
State board of accountancy
For regulations regarding practice as an accountant before the Internal Revenue Service, a CPA should look to what source?
Treasury Department Circular 230
What must a platiff prove to be successful in a case based on Securities Exchange Act of 1934>
“RIMS”
- Reliance (plantiff relied on F/S)
- Intent to deceive (scienter exists)
- Material Misstatement
- Suffered financial loss
What terms best describes the relationship between a corporation and the CPA it hires to audit corporate books?
Employer and independent contractor
