Test 2 Flashcards
License to Practice is issued by whom?
State Boards
-They also have oversight and may suspend or revoke the license
- To audit public companies, firm must be registered with
PCAOB – a board established by Sarbanes-Oxley.
Consequences
-Possible sanctions – admonishment, corrective action,
Suspension, expulsion
- A member is expelled (without a hearing) if:
~The CPA’s certificate is revoked by a state disciplinary board.
~Convicted of a crime punishable by more than one year in jail.
~Filed or aiding and abetting in filing a fraudulent tax return for a
client or self.
~Intentionally failed to file own tax return.
Common Law Liability
-based on case law
~Breach of contract (privity), Negligence, and Fraud
There is no what between accountants and their clients under the CL or federal statute?
No privileged communications
For an accountant to legally refuse to testify in court, the following must occur:
-State law must recognize the accountant’s client communication as
privileged.
-The communication must be intended to be confidential and
-No consent to testify is granted by the client.
Liability for Fraud
-Elements of Fraud:
~Intentional misrepresentation (scienter) of a material fact
~ Justifiable (reasonable) reliance thereon
~ To the detriment of the relying party (damages)
~Resulting damages. Note: Punitive damages may be
available.
- “Scienter” (intent to deceive) may be satisfied if there is a
reckless disregard for the truth also known as
constructive fraud.
Working papers
absent an agreement to the contrary,
working papers (notes, computations) are owned by the
accountant. If a valid subpoena is issued by the court,
these papers must be produced.
Privileged Communications
Although client information
is considered confidential, there are no privileged
communications between accountants and their clients
under the CL or federal statute.
Refusing to Testify
-For an accountant to legally
refuse to testify in court,
the following must occur:
~State law must recognize
the accountant client
communication as
privileged.
~The communication must
be intended to be
confidential and
~No consent to testify is
granted by the client.
Sources of Accountant’s Criminial Liability
-Securities Acts of 1933 and SEA of 1934: Willful illegal conduct, intential omission of material facts, false information
-RICO: includes fraud, money laundering, and violations of securities laws and has been expanded to allow civil lawsuits by private parties
Purpose of Securities Acts
-Full and fair disclosure
- Prohibit unfair, deceptive, and manipulative
practices
1934 Act (Secondary Market)
-The Securities Exchange Act of 1934 as also called the Continuous
Disclosure Act. Accountants’ civil liability comes from sections 10
and 18 of the act. The plaintiff may sue based on virtually any false
statement.
~ 10-K is the annual financial report.
~10-Q is the quarterly financial report.
Section 10
- Section 10 (anti-fraud provision) covers all securities.
-There is no S/L. - The plaintiff must have damages.
-There must be a material omission or misstatement.
-Reliance
-“Scienter” – intent to deceive, manipulate or defraud.
Private Securities Ligitation Reform Act
-if an auditor detects illegal
activity, the audit committee or the board of directors
must be immediately notified.
PCAOB
- Sarbanes Oxley also created the Public Company
Accounting Oversight Board - to regulate firms
that audit public companies
Sole Proprietorship
-Common law – no filings required
-Advantages:
~No organizational fees
~Proprietor makes all decisions
~No double taxation
-Disadvantages:
~ Unlimited personal liability
~Capital is limited by the funds that the sole proprietor has or can
borrow.
General Partnership
-Creation
~ 2 or more people carry on a business as co-owners for
profit.
~May be created by estoppel (conduct) – be careful when
combining control/management and a share of the
profits
~Common law entity – A written agreement is not
required; however, if the partnership is not capable of
being performed within a year, there must be a written
partnership agreement.
~Fictitious name filing may be necessary.
Owning Property
-a partnership may own property in the partnershiip name
Management
-Sharing profits and losses
-Salary
-Right to inspect the books
-Fiduciary relationship
-Decisions
-Ordinary business decisions require a majority
-Unanimous vote is required for the sale of good will, submitting a
partnership claim to arbitration, engaging in an assignment for the
benefit of creditors, admission of a new partner, confession of
judgment, making the partnership a surety
Limited Partnerships (RULA)
-At least one general partner and one limited partner
-Limited partner is liable up to capital contribution.
- Limited partner has restriction on active participation in partnership and
name must not appear in the partnership name.
-*Death of a limited partner does NOT terminate the limited partnership.
-Profits and losses are shared per articles of agreement.
**If agreement is silent, profits and losses are shared in proportion to capital contribution.
This differs from a general partnership.
Limited Liability Company
-Created by state statute – 30 year duration…NOT
PERPETUAL EXISTENCE.
- LLC must appear in the name. S/H are called “members”
-Combines many of the advantages of a partnership and a
corporation.
~Limited liability (Limited to capital contribution) to all members.
~All members may vote and participate
~No double taxation
~No limit on the number of shareholders
Limited Liability Partnership (LLP)
-Not available in all states.
- A partner has limited liability (capital contribution) for the
torts committed by other partners.
-Unlimited liability for your own torts and for the torts of
those you directly supervise.
-Joint and several liability for contracts and other debts of
the LLP.
Corporations
-Advantages:
~Limited liability
~Easy to transfer ownership
~ Perpetual existence
-Limited liability can be lost if a court “pierces the corporate
veil”. This may be done if:
~The corporation was grossly undercapitalized,
~ It was formed to perpetrate a fraud, or
~The shareholders have comingled personal funds with corporate
funds and assets.
