Professional Responsibilities and Business Law Flashcards
Common Law
Historically established by judicial precedents. Much is now codified into state statutes.
- Breach of Contract
- Ordinary Negligence (Ultramares: accountant only liable to primary beneficiaries)
- Gross Negligence
Constructive fraud
Failure to use even slight care (gross negligence). Contributory negligence not a defense. Punitive damages may be awarded.
Scienter: (1) intent to mislead with accountant’s knowledge of falsity or (2) Reckless disregard of the truth
Contributory negligence
Negligence on the part of the plaintiff that contributed to the party’s loss. Will typically mitigate some or all of the defendants charges.
Due diligence
Securities Act of 1933 - standard of care: reasonable investigation, reasonable grounds of belief
Fraud
Misrepresentation intended to mislead, or made with reckless disregard for the truth
Joint liability
Joint defendant may be forced to pay the entire amount of a judgement
Joint and several liability
Joint liability where a defendant may collect from other defendants their proportionate shares of the judgement
Joint Ethics Enforcement Program (JEEP)
joint program of the AICPA and state CPA societies to jointly investigate ethics violations
Negligence
failure to perform with the level of skill and judgement possessed by a typical professional (ordinary negligence). Contributory negligence may be used in defense. Punitive damages not assessed.
Primary beneficiary
party other than the client who primarily benefits from the contracted services provided by the CPA
Privileged Communication
not subject to disclosure in court. Must be established by law. Generally accountant-client communication is not privileged
Privity
a mutual relationship established between parties typically by contract (ex: client and third-party beneficiaries)
Public Company Accounting Oversight Board (PCAOB)
5 member nonprofit org created by SOX Act to oversee the audits of public companies (2 CPAs, 3-non CPAs)
- registers and inspects public accounting firms (audits of issuers)
- sets standards on auditing, quality control, independence and preperation of audit reports
Public Company Accounting Reform and Investor Protection Act
Sarbanes-Oxley Act - set a new set of enhanced standards for public company boards, management and public accounting firms. Established the PCAOB.
Workpaper retention: (1) rquires retention of workpapers for 5 - 7 years (2) makes illegal destruction or falsifying records to impeed investigations (3) imprisonment up to 20 yrs
Audit partner must change every 5 years
Racketeer Influenced and Corrupt Organization (RICO) Act
allows prosecution of organized criminals. has been used to pursue CPA firms who engage in multiple instances of wrongful acts. allows Treble damages.
Securities Act of 1933
Covers initial registration of securities (within 3 years of IPO).
Plaintiff must prove (1) damages were incurred and (2) there was material misstatement in the registration statement (plaintiff need not prove reliance or negligence)
Defense: due diligence, plaintiff’s knowledge of misstatement, lack of causation
Damages: difference between amount paid & market value at time of suit, not to exceed price at which security was offered to the public.
Securities Exchange Act of 1934
covers secondary purchase and sale of securities and for equity securities where the corp has over $10 mill in assets and 500 stakeholders. Plaintiff must prove: (1) damages resulted (2) there was material misstatement (3) reliance (4) scienter.
Auditors must establish procedures to (a) detect matierial illegal acts (b) identify material related-party transactions and (c) evaluate ability of firm to continue as going concern.
Illegal Acts: if material, auditor must report to the Board. The Board must report to the SEC within one day. If not done, the auditor must furnish SEC with a copy of the auditor’s report.
Several liability
joint defendants are responsible only for their proportionate share of the judgement
State boards of accountancy
regulate practice of public accounting
Statements on Standards for Tax Services
AICPA standards for CPAs that perform tax services for clients
Treasury Department Circular 230
regulatory requirements regarding authority to practice before the IRS
US Securities and Exchange Commission
responsible for enforcing the federal securities laws and regulating the securities industry
Accountants Liability (Common Law)
Foreseen party
Third party who the accountant knew would rely on financial statements
Foreseeable party
Any party that accountant could reasonably foreseen would receive and use financial statements
Auditors Liability
Federal Securities Acts
Form 8-K Disclosure
Required by suecurities laws - discloses material events such as change in corporate control, amount of issued securities, illegal acts, reports a change in auditor (client discloses reason for the change, and the auditor agrees or states their disagreement).
must be filed within 4 days of occurance triggering the event
Subsequent Events - Liability
Accountant my be held liabile if they make assurance that there are no material changes when infact there are.
Tax Positions
Realistic possibility: requires as much as one-third likelihood of sucess
More likely than not standard requires more than 50% probability of sucess
Substantial authority: when the weight of authorities supporting the position is substantial in relation to the weight of those taking a contrary position. Requires at least a 40% probability of sucess.
Reasonable basis: requires at least a 20% chance of success
Covered Opinion
Covered under Circular 230 - written advice involving a listed transaction or a place or arrangement with the principal purpose of tax avoidance.
Reliance Opinion
Under Circular 230 - Written advice that concludes the tax position is more likely than not to be successful.
Tax preparer penalties
The greater of $1,000 or 50% of the income derived
If error resulted from willful attempt to understate liability or gross negligence: The greater of $5,000 or 50% of income derived
Penalties can be avoided if there is evidence of: (1) substantial authority (40%), (2) adequate disclosure and reasonable basis for the position (20%) (3) more likely than not standard (for tax shelter positions) (50%) and (4) reasonable cause
Uniform Accountancy Act (UAA)
developed by the AICPA to provide state jurisdictions a model act to regulate CPAs
- Bachelors Degree and 150 semester hours required
- Sets continuing education standards
- facilitates interstate practice and free movement of CPAs between states
- Ethical provisions: AICPA Code of Professional Conduct
- State boards are responsible for issuing licenses
AICPA Disciplinary Stystems
Professional Ethics Executive Committee (JEEP) - AICPA committee disciplinary measures may include:
a. No violation/dismissal
b. Public Admonishment
c. Corrective action (continuing education)
d. Suspension for up to two years
e. Explulsion from AICPA: for (1) having license revoked by state board, (2) conviction of a crime punishable by a sentance over one year (3) files a fraudulent tax return (4) intentionally fails to file personal return
SEC Disiplinary actions
- revoke of suspend an accountant from practicing before SEC (they cannot serve as an auditor for issuer
a. willfull violation of federal securities laws or regulations
b. upon conviction of felony or misdemeanor in which moral turpitude was involved
c. can penalize with civil fines and mandates to pay profits gained from violations. - can prohibit an accountant or firm from doing work for an issuer
- Criminal Liability: (a) Intentional misleading omission of material facts and (b) putting false information in the registration statement
Subject to $10k fine and 5 years in prison
Third Party Liability
(Common Law)
1 .Ultramares: accountants are held liable for ordinary negligence only to parties who primarily benefit from the audit or statements.
Private Securities Litigation Reform Act
Ammends the FSA of 1933 and FSEA of 1994.
- reducess lawsuits against accountants by creating a “safe harbor” for preparation of forward-looking statements
a. auditors must identify assumtions
b. awards costs and attorneys’ fees against parties failing to fulfill pleading requirements
c. accountants have several liability unless they knowingly caused harm (if knowingly then owe their porportionate share + 50%) - Requires auditors to establish procedures to:
a. detect material illegal acts: must inform the Board, and SEC if Board does not
b. identify material related-party transactions
c. evaluate the ability of firm to continue as a going concern
