R5 - Business Law (Nonethics) Flashcards
If a CPA does not fulfill the terms of his engagement, the client can hold the CPA liable for ________.
Breach
Contract liability generally requires _______, so only a party to the contract can sue under a contract theory (client and named 3rd party).
Privity
If the CPA’s breach is material, is he entitled to payment for his services?
NO
What is a tort?
A wrongful act
What are three types of torts?
- Negligence
- Constructive fraud (aka gross negligence)
- Fraud
Is failure to warn a client of known internal control weaknesses negligence?
YES
Is failure to properly supervise/review negligence?
YES
A CPA’s duty to act with reasonable care generally runs only to clients and who under the majority rule?
Any person or limited foreseeable class of persons (lenders or investors) whom the CPA knows will be relying on the CPA’s work
A minority of states follows the _______ decision, which limits the CPA liability more narrowly to persons in _____ of contract with the CPA (clients) and named third parties.
- Ultramares
- Privity
Is privity a defense to fraud?
NO
What is the best defense for fraud?
Lack of scienter/good faith
What is the best defense for breach of contract?
Client hindered performance
What is the best defense for negligence?
Due diligence
Lack of reasonable care = ?
Ordinary negligence
Lack of even slight care = ?
Gross negligence or constructive fraud
Actual fraud = ?
Actual intent to deceive
What does the plaintiff have to prove if suing for a violation of Section 11 of the 1933 Act (IPOs)?
LAM
- Loss
- on Acquired Stock
- due to Material Misstatement
A CPA can be held criminally or civilly liable for material misstatements or omissions made in connection with the purchase and sale of securities under Rule _____ of the 1934 Act.
Rule 10b-5
Is a CPA liable to anyone in a class of third parties whom the CPA knows will rely on the opinion if he negligently gives an opinion on an audit of a client’s financial statements?
YES
Negligence has what four elements?
- Duty of care
- Breach
- Causality
- Injury
Is reliance an element of negligence?
NO
What does the 1933 Act regulate?
Original issuances of securities
What does the 1934 Act regulate?
Purchases and sales after initial issuance
Is the following a security?
Limited partnership interests
YES
Is the following a security?
Oil well interests
YES
Is the following a security?
Collateral trust certificates
YES
Is the following a security?
CDs
NO
Is the following a security?
General partnership interests
NO
If the investor is passive, the investment most likely is a _____.
Security
What is the purpose of the Securities Act of 1933?
Provide investors w/ sufficient investment information
The registration requirements of the 1933 Act only apply to whom?
- Issuers
- Underwriters
- Dealers
What is defined as a written offer to sell securities?
Prospectus
When does the registration statement become effective?
20th day after its filing w/ the SEC
Generally, what are blue sky laws?
State laws governing stock sales
In the prefiling period, is sales activity allowed?
NO
Before registration, what is the only thing you can do?
Negotiate w/ the underwriter
In the period after registration but before effectiveness, what type of ads may be made?
Tombstone ads
What is in a tombstone ad?
Ad identifies the security, its price, and who will execute orders
What is defined as issuers that have been continuously reporting under the 1934 Act for at least 12 months, have not failed to pay dividend or required payment on preferred stock, and have not defaulted on material debt or a LT rent obligation in the current fiscal year?
Seasoned issuers
What is defined as seasoned issuers with at least $700 million in equity o/s worldwide in the hands of persons not affiliated with the issuer or most issuers that have issued at least $1 billion in nonconvertible securities in the last 3 years?
Well-known seasoned issuers
Is Regulation A a full exemption?
NO; partial exemption
Regulation A sales may not exceed what amount in a 12-month period?
$5 million
Does the 1933 Act apply to private offerings?
NO
Regulation D exempts what type of offerings?
Private offerings
To be exempt under rule 504 the issuance of securities may not exceed what amount w/i a 12-month period?
$1 million
To be exempt under rule 505 the issuance of securities may not exceed what amount w/i a 12-month period?
$5 million
What is the dollar limitation under rule 506?
None
Are there limits on unaccredited buyers under Rule 504?
No limit
Are there limits on unaccredited buyers under Rule 505?
Up to 35
Are there limits on unaccredited buyers under Rule 506?
Up to 35, who must be sophisticated
Who may be liable under Section 11 of the 1933 Act?
Anyone who signs (privity not required)
What type of companies must register their securities and comply with the 1934 Act?
1) Public companies OR
2) Private companies with more than (i) $10 million assets and (ii) at least 2,000 shareholders or 500 unaccredited shareholders
The Form 8-K must be filed within how many days after a major change in the company?
4 days
The Form 10-Q is a quarterly report that must be filed within how many days of the end of the first three quarters of each fiscal year?
40 days
The Form 10-K is an annual report that must be filled annually within how many days of the end of the fiscal year?
60 days
True or false.
In general, Rule 10b applies even if registration is not required.
True
A tombstone advertisement makes known the availability of a _________
Prospectus
