Securities Laws and Liabilities of CPAs

Question 1

To WHOM do the reporting requirements and rules of the Securities Exchange Act of 1934 apply to?

Answer 1

A corporation that registered under the Securities Act of 1933 BUT

• that did not register under the Securities Exchange Act of 1934

Question 2

What is a “Tender Offer?”

Answer 2

AN offer to shareholders to buy their stock to gain control of a corporation

Question 3

What are some examples of a “Security” under the 1933 Act?

Answer 3

• Warrants
• Stock Options
• Limited Partnership Interests

NOTE: General Partnerships are NOT necessarily considered securities as the partners investment interest is probably attributed to their own effort

Question 4

What is the extent of liability of a CPA who negligently prepares a client’s tax return?

Answer 4

Anyone in a class of third parties who the CPA knows will rely on the opinion

Question 5

What would be considered a “substitute” for proof of reliance on a misstatement?

Answer 5

Fraud-On-the-Market Theory

i.e. Proof that the price of a security was affected by a material misstatement or omission

Question 6

What requires audits to provide reasonable assurance of detecting illegal acts?

Answer 6

The Private Securities Litigation Reform Act of 1995

Question 7

What “act” prohibits any scheme to defraud?

Answer 7

Rule 10(b)5 of the Securities Exchange Act of 1934

Question 8

What element of fraud is not included in negligent misrepresentation?

Answer 8

Scienter

i.e. Negligent misrepresentation includes all elements of fraud except scienter, which is “actual” or “implied” knowledge of fraud

Question 9

What type of causation is an element of negligence?

Answer 9

“Proximate Cause”

i. e. This means that the plaintiff must prove that
(1) the defendant breached a legal duty to the plaintiff and
(2) the breach actually and proximately caused the plaintiff’s damages

Question 10

What is a characteristic of a “Primary Beneficiary?”

Answer 10

Identification of the third party (which would fall under this category if):

(1) the accountant is retained principally to benefit the third party
(2) the third party is identified, and
(3) the benefit pertains to a specific transaction

Question 11

What is considered “Short-Swing” Stock under the Securities Exchange Act of 1934?

Answer 11

Profits arise from the sale and purchase (purchase and sale) of the issuer’s stock within 180 Days

i.e. a 6-month Period

Question 12

When would a CPA be liable for “Punitive damages” under common law action?

Answer 12

WHEN the circumstances are extreme or aggravated

Question 13

WHAT is considered a reasonable defense a CPA firm can assert in a suit for common law fraud resulting from preparation of a tax return?

Answer 13

LACK OF SCIENTER

i.e. false representation with knowledge of its falsity or with reckless disregard as to its truth

Question 14

WHAT fact must be proven for a Plaintiff to prevail in a state-law negligent misrepresentation action against a CPA (Defendant) who prepared a borrower’s tax return?

Answer 14

The plaintiff justifiably relied on the misrepresentations

Question 15

What is considered the statute of limitations on an action by a purchaser of securities relying on the Securities Act of 1933?

Answer 15

1-Year after the false statements or omissions of material fact were discovered or should have been discovered; Or

Within 3 years after the security was first offered to the public

Question 16

What does the CPA need to prove to be exempt of liability under section 18 of the Securities Exchange Act of 1934?

Answer 16

Good faith and lack of knowledge of the statement’s falsity

Question 17

What are one of the conditions that apply to private placement offerings under Regulation D of the Securities Act of 1933?

Answer 17

THE Securities cannot be the subject of an immediate unregistered reoffering to the public

i.e. this exempts securities to restriction so that they may be resold only by registration or in a transaction exempt from registration

Question 18

WHAT would a Plaintiff be entitled to if they succeed in the Section 10(b) and Rule 10b-5 suit against a Defendant?

Answer 18

THE amount of any (loss) caused by the fraud (in the event that the Loss was fraud based)

Question 19

WHAT (4) Conditions must be met in order to support a finding of “constructive” common law fraud

Answer 19

(1) misrepresentation of a material fact
(2) reckless disregard for the truth (i.e. Gross Negligence)
(3) reasonable reliance by the injured party
(4) Injury

Question 20

WHEN is the Form 10-Q reported?

Answer 20

FOR the first 3-Quarters of the Fiscal Year

NOTE: If new information is reported/ discovered during Q4 of the year, this information will MOST likely be reported in the fiscal years’ 10-K and NOT the 10-Q (No 10-Q for Forth Quarter)