Regulations Flashcards
Scienter
Scienter means that the party acted with evil intent or deliberate motive.
SSTS
Statements on Standards for Taxation Services
Actual Fraud
requires the professional to intentionally misstate a material fact or otherwise mislead the client.
Constructive Fraud
Results when a professional is grossly negligent in performance of their duties. A very common corollary of gross negligence includes the professional intentionally disregarding the consequences of a failure to perform their professional duties. onstructive fraud does not require the CPA (or any professional) to act with fraudulent intent
Common Law Fraud
requires an intent to deceive
AICPA Code of Professional Conduct
- self-review (auditing the auditor’s own work),
- advocacy (promoting a client’s interests),
- adverse interest (taking action against the attest client such as litigation),
- familiarity (having a close or long-standing relationship with the attest client),
- undue influence (client attempting to coerce the auditor),
- financial self-interest (directly benefiting due to a financial interest in the client), and
- management participation (taking on the role of management).
Section 11, the Securities Act of 1933
requires that the accountant show that the accountant had “after reasonable investigation, reasonable grounds to believe and did believe, at the time such part of the registration statement became effective, that the statements therein were true and that there was no omission of a material fact required to be stated therein or necessary to make the statements therein not misleading.” Notice that in no part of this section is there a requirement to perform an additional review at the time the registration statement becomes effective. However, there is nothing to preclude an accountant from pursuing this additional effort and logic dictates that such an effort certainly would be noted favorably in any litigation.
Section 18 Securities and Exchange act 1934
provides for liability in the case of an intentional misrepresentation or omission of a material fact in connection with the purchase or sale of any security
GAAS
Generally accepted auditing standards (GAAS) are the Statements on Auditing Standards issued by the Auditing Standards Board (ASB), the senior committee of the AICPA designated to issue pronouncements on auditing matter for nonissuers. The Compliance with Standards Rule (ET 1.310.001) of the AICPA Code of Professional Conduct requires any AICPA member who performs an audit of a nonissuer to comply with the standards promulgated by the ASB.
Section 11 of Securities act 1933
deals with the civil liability for damages related to registration statements that are filed with the SEC. Generally, the accountant will be liable if the accountant prepared any financial statements that “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading
Privity
the existence of a contractual relationship between two parties. It is the relationship of direct involvement between the parties to a contract. When privity exists, the plaintiff need only prove simple negligence in a lawsuit for breach of contract.
privity is not required if the accountant has been guilty of fraud or gross negligence
Regulatory Agency
Is one established by legislation that promulgates rules and regulations that professional adhered too.
Government Accountability Office
is a federal agency and has power by law to promulgate standards for audits of federal financial assistance recipients. Because of its position, the GAO is also active in releasing reports concerning audits, Congressional testimony, and the like.
Acts Discreditable Rule
prohibits the retention of client records after the client has demanded them, even if the engagement is terminated prior to its completion
Consulting Services
Advisory, Implementation, Product services
Section 10(b) of the Securities Exchange Act of 1934
a CPA may be liable if it can be proven that the CPA was guilty of “scienter” (an intent to defraud). This would include actions on the part of the CPA indicating that he or she acted without good faith. Mere negligence is not enough to impose liability on the CPA under this statute.
Established Negligence a Client must show
the CPA owed a legal duty,
the CPA breached that duty,
the CPA’s action was the proximate cause of the resulting injury to the client, and
the CPA’s actions caused the damage or loss.
SSTS3
states that a CPA may generally rely on information furnished by the client or third parties unless the information appears to be incorrect, incomplete, or inconsistent with information known by the CPA. SSTS 3 would require the CPA to make additional inquiries if the information appears to be incorrect, incomplete, or inconsistent with known facts or if information from third parties contradicts the information. There is no prohibition against looking at prior tax returns. Section 10.34(d) of Treasury Department Circular 230 contains similar requirements.
Statements on Standards for Tax Services (SSTS) 6
states that when preparing a return, the CPA should inform the client promptly upon becoming aware of an error in a previously filed return. The CPA should recommend the measures to be taken. If corrective measures are not taken, or if the CPA is requested to prepare the current year’s return and the client has not taken appropriate action to correct an error in a prior year’s return, the CPA should consider whether to withdraw from preparing the return and whether to continue a professional relationship with the client. If the CPA does prepare such current year’s return, the CPA should take reasonable steps to ensure that the error is not repeated.
Treasury Circular 230, Section 10.20(a),
A practitioner must, on a proper and lawful request by a duly authorized officer or employee of the Internal Revenue Service, promptly submit records or information in any matter before the Internal Revenue Service unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.”
In addition, “Where the requested records or information are not in the possession of, or subject to the control of, the practitioner or the practitioner’s client, the practitioner must promptly notify the requesting Internal Revenue Service officer or employee and the practitioner must provide any information that the practitioner has regarding the identity of any person who the practitioner believes may have possession or control of the requested records or information.”
Hence, the CPA must notify the IRS of the identity of any person who, according to the CPA’s belief, could have the records.
ET Section 0.300.030
(“The Public Interest”) provides that those who accept membership will do so only as long as they honor the public trust.
ET Section 191.034
indicates that if membership in a client social club, such as a country club, is basically only for social purposes and the CPA does not serve on the board of directors, then independence would not be violated.
IRS Publication 552
F you… THEN the period is…
- Owe additional tax and (2), (3), and (4)
do not apply to you 3 years - Do not report income that you should and
it is more than 25% of the gross income
shown on your return 6 years - File a fraudulent return No limit
- Do not file a return No limit
- File a claim for credit or refund after Later of 3 years or 2
you filed your return years after tax was
paid - File a claim for a loss from worthless
securities 7 years
Negligence
defined as the failure to do what an ordinary, reasonable, prudent CPA would do in similar circumstances
Federal Reporting entities
will be required to follow the rules established by the Federal Accounting Standards Advisory Board (FASAB) when reporting to the public or other agencies.
AICPA
American Institute of Certified Public Accounts
Section 10(b) and Rule Sections/Rules 10b-5 of the Securities Exchange Act of 1934
he professional’s intentional material misstatement coupled with reasonable reliance by the purchaser results in liability. Jay’s liability under these sections/rules requires more than mere negligence (carelessness) and a misstatement or omission of material fact. Furthermore, the amount of the loss is irrelevant
Government Accountability Office (GAO)
is a federal agency and has power by law to promulgate standards for audits of federal financial assistance recipients. Because of its position, the GAO is also active in releasing reports concerning audits, Congressional testimony, and the like.
Ultramares doctrine
a CPA is not liable to third parties for mere negligence, but may be held liable to any party who suffered a loss as a result of fraud or gross negligence. These third parties need not be in privity of contract with the CPA and need not be specifically known to the CPA.
If the client was aware of the fraud and did not rely on the opinion, the client would not be successful in holding the CPA liable, even for fraud.
ET 1.240.010.01
, the auditor would not be independent if the auditor had any direct financial interest in the client. Therefore, materiality is not considered because any interest in the client’s ownership violates independence.
