R5 Ethics and Professional Responsibilities in Tax Services

Question 1

When is a tax return position not considered unreasonable?

Answer 1

1. More likely than not
2. Substantial authority, disclosure does not matter (unless tax shelter or reportable transaction?)
3. Reasonable basis AND disclosed

Question 2

Ultramires vs. majority rule?

Answer 2

Ultramires–only privity
Majority rule–Under the majority position an accountant is liable for negligence only to third parties whom the accountant knows or should foresee will be relying on the accountant’s work. (watch this one, wording can be tricky)

Question 3

Best defense against fraud?

Answer 3

lack of scienter

Question 4

What is necessary to show to win a case under Section 11 of the 1933 act (IPO)? How about for Rule 10b-5 of the 1934 Act (Fraud)?

Answer 4

To win under section 11, you need to prove 3 things.

1. Plaintiff acquired stock
2. CPA made a material misrepresentation
3. Plaintiff suffered damages.

To win under section 10b-5 for fraud, you need to prove these three things (misstatement, purchase stock, and suffered loss) as well as

4. plaintiff relied on the misrepresentation
5. misrepresentation was made with Scienter (remember that negligence doesn’t count for 10b-5)

Question 5

Negligence has 4 elements: Name them.

Answer 5

duty of care, breach (which is lack of due care), causality and injury.

Question 6

What is the best defense to a section 11 suit?

Answer 6

Due Diligence

Question 7

What is the best defense against common law fraud?

Answer 7

You did not have actual or constructive knowledge of the fraud.

Question 8

A company must be registered with the SEC if:

Answer 8

The company has both 500 or more shareholders in a class of shares and total assets of more than $10 million, or
The company is currently traded on a national stock exchange, or
The company (issuer) is required to register under the 1933 Act.