R5 BLAW Flashcards
CPA Legal Liability
can arise from:
- Breach of Contract
- Tort (negligence, fraud, or constructive fraud)
- Violation of Statute (33 and 34)
Breach of Contract
If CPA doesn’t fulfill terms of engagement
- generally requires privity (client and named 3rd parties)
- if CPA breach is material, not entitled to payment
- defenses mentioned in contract apply
(e. g. client’s failure to let CPA see acct records if failure to cooperate and valid)
Ordinary Negligence
Tort
- must show: duty of care, breach, caused injury, and damages
- majority rule: duty to client and limited forseeable class of persons whom CPA knows will rely on work
- minority ultramares decision: duty to privity so clients and named third party beneficiaries
- defense: neither client nor person who CPA knows will rely on audit (gen public/creditors) NO PRIVITY
Breach- failure to act w due care (ordinary negligence)
- perform w skill and care expected of ordinarily prudent CPAs under the circumstances
- defense: due diligence, followed GAAS or GAAP
Fraud and Constructive Fraud
Tort
Actual Fraud MAIDS
- misrepresentation of material fact
- actual reliance on misrepresentation
- intent to induce reliance
- damages
- scienter: intent to deceive
Constructive Fraud/Gross Negligence
- MAIDS but instead of scienter, reckless
CPA can be liable to anyone
- privity is not a defense to fraud
- best defense: lack of scienter (had good faith)
Securities Laws
Section 11 of 1933 Act
Rule 10b-5 of 1934 Act
Private Securities Litigation Reform Act
Sarbanes-Oxley Act
Section 11 of 1933 Act
IPO "LAM" CPA who signs on FSs in a registration statement can be held liable to a plantiff who "LAM" - loss suffered - acquired the stock - material misrepresentation in FS
defense: due dilligence
no intent, negligence, or reliance required
Rule 10b-5 of 1934 Act
Fraud “MAIDS”
CPA can be held criminally or civilly liable if proven:
- loss suffered
- acquired the stock
- material misrepresentation (LAM same as section 11)
- scienter
- reliance on misrepresentation
Private Securities Litigation Reform Act
CPA has certain duties in an audit under 1934 Securities Exchange Act
Audit Requirements
- designed to detect illegal acts
- designed to identify related party transactions
- evaluate the ability of issuer to continue as a going concern
Detection Procedure
- if illegal acts found, inform issuer’s audit committee
- if AC doesnt take action, report directly to board of directors
Notification to SEC
- board is to report to SEC within 1 day
- if CPA fails to receive copy of notice w/i 1 day, CPA is to furnish SEC w copy of report within 1 day
- CPA may resign from the audit before notifying SEC
Not liable for breach of confidentiality
Sarbanes-Oxley Act
under SOX, it is a crime:
- to knowingly alter, destroy, falsify, etc document to impede federal investigation,
- not keep audit workpapers for 7 years
- defraud
Audit Workpapers
- workpapers belong to the accountant or accountant’s firm, not the client
prohibited from showing papers to anyone w/o client’s permission EXCEPT:
- subpoenaed
- shown to prospective purchaser of CPA’s practice as long as they don’t disclose confidential information (but not given)
- CPA society voluntary quality control review
- defense of a lawsuit
- official investigation by AICPA/state trial board
- GAAP/GAAS requires disclosure
Security Definition
If investor is passive, the investment is most likely a security
include: stocks, bonds, debentures, oil well interest, stock options, collateral trust certificates, warrants, and limited parternship interests
excluded: certificates of deposit and general partnership interests
Securities Act of 1933
regulates original issuance of securities (IPO)
purpose: provide investors w sufficient investment info
- requires most issuers to register new issues of securities w SEC and provide prospectuses containing material info regarding securities
- SEC doesn’t guarantee accuracy of this info, just evaluates completeness
Required to Register: Issuers, Underwriters, and Dealers
Registration Statement
Securities Act of 1933
most securities can’t be sold unless registered w SEC
Part 1- The Prospectus
- a written, radio, or television offer to sell securities
- summarizes info about securities
- each investor must receive a copy of the prospectus before or contemporaneous w every sale of security
Part 2- Info about securities being issued must include
- Audited BS and profit and loss statement from a certified public accounting firm registered w PCAOB*
- names and addresses of directors, officers, underwriters, and shareholders w >10%
- amount of stock and debt issuer has outstanding
- principal purpose offering proceeds will be used for
- anything that might affect value of the securities
Shelf Registrations- just 1 registration statement for all securities they will offer in the future
- GR prohibited, but permitted if issuer has filed under 1934 act for a year and info is continuously updated
SEC reviews the registration statement to ensure completion of both parts
Effective 20 days after filing
Blue Sky Laws- state laws governing stock sales
Timetable of Sales Activity
Securities Act of 1933
30 days before Registration- No Sales Activity Allowed
- permitted to negotiate w an underwriter
After Registration but Before Effectiveness (20 days)- sales GR prohibited but these are allowed:
- oral offers to sell (but no written)
- tombstone ads
- preliminary (red herring) prospectus
After Effective Date
- can be sold, all investors must receive a prospectus
Special Rules for Some 1934 Act Reporting Companies (large private company now going public)
- seasoned issuers have reported under 1934 for >12 months and have been good
- well-known seasoned issuers also have 700 million equity outstanding worldwide
- WKSIs can make oral or written offers at any time and also have a special form of shelf registration effective immediately
Exemptions from Registration
Securities Act of 1933
1933 has 2 types of exemptions
- Securities Exemptions “BRINGS”
- banks and savings and loans (CDs)
- railroads/common carriers
- insurance policies (not companies)
- not for profit orgs
- government
- short term commercial paper (maturity date 9 months or less) - Transaction Exemptions
- non issuer, underwriter or dealer (casual sales)
- exchanges w existing holders and corporate reorganizations
- intrastate sales
- private offering exemption- regulation D*
- regulation A*