REG 5 BUS LAW BK Flashcards
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Another name for constructive fraud?
Gross negligence
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What are the elements of negligence?
Duty, breach of that duty, causation and damages.
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Who is the CPA liable to for negligence under the majority rule?
To any limited foreseeable class of persons whom the CPA knows will be relying on the CPA’s work.
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What is the Ultramares decision?
Limits CPA liability for negligence to persons in privity of contract with the CPA and named 3rd party beneficiaries.
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Defense for CPA under breach of duty?
The person is neither a client nor a person that the CPA knows will be relying on the audit.
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Best evidence that a CPA acted like a reasonably prudent CPA?
Followed GAAP/GAAS
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Elements of actual fraud
- Material misrepresentation 2. Actual reliance 3. Intent to deceive 4. Damages 5. Scienter
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Difference between actual and constructive fraud?
Constructive fraud— same elements except no intent to deceive, rather the defendant acts recklessly
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To whom is a CPA liable for fraud?
Anyone who can prove the elements of fraud.
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What must be proven for a CPA to be liable under Section 11 of the 1933 Act?
“LAM”– loss occurred, acquired stock, material misrepresentation
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What must be proven for a CPA to be liable under Section 10b-5 of the 1934 ACT?
“LAM”, scienter, and reliance (fraud). Also, interstate commerce must be involved.
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Who may accountant show workpapers to without client’s permission?
If the papers are subpoena’s in a court case, a prospective purchaser of the CPA’s practice, a state CPA society voluntary quality control review panel, and official investigation by the AICPA/state trial board, and where GAAP/GAAS require disclosure.
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Major difference between Securities Act of 1933 and Securities Exchange Act of 1934?
1933 Act regulates original issuance of securities, 1934 Act regulates purchases and sales after initial issuance.
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Rule of thumb for determining if something is a security?
Someone else manages it, ie investor is passive.
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Purpose of SEC?
To provide enough information for investors to make decisions. The SEC does not evaluate the information for accuracy, the offering’s financial merits, etc.
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What types of people must register under the 1933 Act?
Dealers, underwriters, issuers—- Don’t get a “DUI” after you register your securities :)
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When are prospectuses required?
Unless a issuance is exempt, each investor must receive a copy of the prospectus before or contemporaneous with every sale of the security.
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Who must certify the financial statements of a registrant under the 1933 Act?
A public accounting firm registered with PCAOB.
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When is shelf registration permitted?
If issuer has continuosly filed under 1934 Act for one year and the info is continuously updated.
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What sales activities are allowed during the 20 day period between registration and filing?
Oral offers to sell, tombstone ads, red herring prospectus
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What securities are exempted from registration
Bank-issued securities, regulated common carrier securities, insurance policies, not-for-profit securities, Gov’t-issued securities, short-term commercial paper (“BRINGS” mnemonic)
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Are exchanges with existing stockholders exempt from registration?
Yes, because there is no creation of new stock, so no need to register.
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What kind of sales that states make are exempt from registration?
Intrastate sales. Interstate sales are not exempt.
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What is Regulation A?
Permits a simplified form of registration. Unaudited financial statements are ok. Regulation A offerings, therefore, do not need to be registered per the requirements of the Security Act of 1933.
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Describe Regulation D general conditions.
Reg D exempts private offerings. Thus, no advertising is allowed. Purchasers may not resell securities that are issued under Reg D to the public for 2 years after purchase. SEC must be notified of the issuance of securities under Reg D within 15 days.
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Disclosure requirements under Rule 505 and Rule 506?
If there are any unaccredited investors, then all investors must be given at least an annual report containing audited financial statements.
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What is Section 11 of the 1933 Act?
Makes anyone who signs a registration statement liable for all damages caused by any material misstatement of fact.
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What must be shown to prevail in a Section 11 suit?
LAM only. NO need for scienter, reliance, negligence.
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What types of companies must register their securities under the 1934 Act?
Companies whose shares are traded on a national exchange and companies that have a) more than $10 million in assets and b) at least 2000 shareholders or 500 unaccredited shareholders
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When is form 10K required to be filed? How about form 10Q? And form 8K?
10K–within 60 days of year end for large corp. and 90 days for small business 10Q—within 40 days of quarter end 8K—within 4 days of a major change in the company
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What are the other required reports other than the 10K, 10Q and 8K?
5% + owners must report, tender offers must be reported, insider trading must be reported, and proxy solicitations and proxy statements must be reported (“5% TIP”)
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What constitutes an insider?
officers, directors, and > 10% owners
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Preparer penalty for understatement of tax liability?
$1,000
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Out of 10K, 10Q and 8K, which report must be certified by independent accountants?
10K
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Section 11 of 1933 Act statute of limitations?
One year after discovery of untrue statement/omission and within 3 years of offering date.
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Are insurance policies regulated by the Sec. Exchange Act of 1933? How about other securities issued by insurance companies?
insurance policies–no. other securities issued by insurance companies—yes.
When is a tax preparer penalized for understatement of tax liability?
When understatement is due to an unreasonable position, the preparer should have known about the unreasonable position, and the position lacks reasonable basis.
