R5 Securities Reg 1 (W) Flashcards
Breach of Contract
If a CPA does not fulfill the terms of his engagement, the client can hold the CPA liable for breach
If the CPA’s breach is material, the CPA is not entitled to payment for his services
Client’s failure to let the CPA see any accounting records is a failure to cooperate and is a valid defense
Negligence (Ordinary)
The plaintiff must show,
the defendant owed a duty of care to the plaintiff
the defendant breached that duty by failing to act with due care
the breach caused plaintiff’s injury
damages
Duty to Act with Reasonable Care
Generally runs only to clients and, under majority rule to any person or limited foreseeable class of persons whom the CPA knows will be relying on the CPA's work Defense is that the plaintiff is neither a client nor a person whom the CPA knows will be relying on the audit
Ultramares Decision
Limits CPA liability more narrowly to persons in privity of contract with CPA (clients) and intended third party beneficiaries
Breach - Failure to Act with Due Care
CPA is to perform with the same skill and care expected of ordinary prudent CPAs under the circumstances
The best evidence that a CPA has acted like a reasonable prudent CPA is that the CPA followed applicable standards for the profession (GAAS or GAAP)
Elements of Actual Fraud
MAIDS
a Misrepresentation of material fact
Actual and justifiable reliance by plaintiff on the misrepresentation
an intent to Induce plaintiff’s reliance on the misrepresentation
Damages
Scienter
Constructive Fraud (Gross Negligence)
The defendant acts recklessly to commit fraud
Liability for Fraud and Constructive Fraud
The CPA can be held liable to anyone who can prove that fraud occurred
Privity is not a defense
Section 11 of the 1933 Act
A CPA who signs off on financial statements in a registration statement can be held liable for misstatements in the financial statements to a plaintiff who
Acquired the stock
Suffered a loss if
The financial statements contained a material misrepresentation/omission of fact
Rule 10b-5 of the 1934 Act
The plaintiff must prove
She bought or sold the securities
She suffered a loss
The defendant made a material misrepresentation/omission of fact
The misrepresentation was made with scienter
The plaintiff justifiably relied on the misrepresentation
Private Securities Litigation Reform Act Audit Requirements
Each audit pursuant to the 1934 Act must include procedures
designed to detect illegal acts
designed to identify related party transactions
to evaluate whether there is substantial doubt about the ability of the issuer to continue as a going concern
Private Securities Litigation Reform Act - Procedures Upon Detection
If the accountant detects illegal acts, she must determine the effect of the illegal act on the issuer’s financial statements and inform the issuer’s audit committee of the illegality
If the audit committee fails to take action with respect to the illegal act, or the client has no audit committee, the auditor is to report the conclusions directly to the client’s board of directors
Private Securities Litigation Reform Act - Notification to SEC
The issuer’s board is to report to the SEC the receipt of any such notice within one day after receiving it and must furnish the accountant with a copy of the notice
If the CPA fails to received a copy of the notice within one day, the CPA is to furnish the SEC with a copy of the report within one day
The CPA may resign from the audit
Private Securities Litigation Reform Act - Limit on Liability
An accountant is not liable in a private action for findings or conclusions made pursuant to the rules of the Act
Sarbanes-Oxley Act
It is a crime
to knowingly alter, destroy, falsify, etc., a document with the intent to impede a federal investigation
for auditors to fail to keep all workpapers related to a public company for at least 7 years
to defraud the public in connection with a registered security
