Legal Liability(英文版)(ppt 40页)

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1、Legal LiabilityChapter 5$2 Billion paid in S&L LawsuitsnErnst&Young1992$400 millionnDeloitte&Touche 1994$312 millionnKPMG1994$187 millionnArthur Andersen1993$82 millionLawsuits Against AuditorsnExpectation gap on detection of fraudnAuditor sued in civil courtnBreach of contractnTort actions for negl

2、igencenCriminal Charges Changed Legal EnvironmentAudit professionals have a responsibility undercommon law to fulfill implied or expressedcontracts with clients.They are liable to their clients for negligenceand/or breach of contract should they fail toprovide the services or not exercise due carein

3、 their performance.Business Failure,AuditFailure,and Audit RiskBusinessFailureAuditFailureAuditRiskBusiness Failure,AuditFailure,and Audit RiskBusiness failureIt occurs when a business is unable torepay its lenders or meet theexpectations of its investors becauseof economic or business conditions.Bu

4、siness Failure,AuditFailure,and Audit RiskAudit failureIt occurs when the auditor issues anerroneous audit opinion as the resultof an underlying failure to complywith the requirements of generallyaccepted auditing standards(GAAS).Business Failure,AuditFailure,and Audit RiskAudit riskIt represents th

5、e risk that the auditor willconclude that the financial statementsare fairly stated and an unqualifiedopinion can be issued when,in fact,they are materially misstated.Lack ofprivilegedcommunicationLiability forthe actsof othersPrudentpersonconceptLegal ConceptsAffecting LiabilityFederalsecurities la

6、wsThird partyClientMajor Sources ofAuditors Legal LiabilityCriminalliabilityLiability to ClientsThe most commonsource of lawsuitsagainst CPAsis from clients.Legal Terms AffectingCPAs LiabilityTerms related to contract lawBreach ofcontractThird partybeneficiaryNegligencenTo be held liable,the auditor

7、s work must be shown as negligent.n Negligence(ordinary)is the lack of reasonable care.nWhat would a prudent auditor do in the same circumstances.nFollowing GAAS is not always enough reasonable caren Gross Negligence is the lack of minimum care.nConstructive fraudn Fraud-an intentional act to deceiv

8、e.Relationship to Sue for Ordinary Negligence nPrivity-party to a contractnMust have privity to sue for breach of contractnContract between auditor and clientnThird Party Beneficiary(standing)nInvestorsnCreditorsnStanding depends on state common law.Third Party Beneficiary-Standing1.Limited exposure

9、 several statesnOnly liable if the third party was specifically known to the auditor and that the third party would be relying on the F/S2.Restatement of Torts majority of statesnLiable to foreseen third party users 3.Reasonably Foreseeable Users Wisconsin and MississippinAlmost unlimited liability

10、to any possible users of the F/S.Liability and StandingnGross negligence and fraud are a basis for liability in tort regardless of privity or standingnOrdinary negligence requires a privity or third party beneficiary relationshipLegal Terms AffectingCPAs LiabilityOther termsCommonlawStatutorylawJoin

11、t and severalliabilitySeparate andproportionateliabilityAuditors LiabilitynJoint and several liability legal-Deep Pocketsnmany state laws allow third party persons to recover damages from the person with the deepest pocketsnProportionate liability-shared responsibility of the damages based on fault

12、Private Litigation Reform Act 1995 nFederal lawsuits under SEC1934 ActnSome states have similar actsnUses proportionate liabilitynResponsibility divided among partiesnIf some of the defendants are insolvent,may increase solvent defendants share by 50%of what they owe.nJoint and severally liable to s

13、mall investor plaintiffs(under$200,000 and lost 10%of net worth)nKnowingly committing a SEC violation can make defendant joint and severally liableSecurities Litigation Uniform Standards Act 1998nLawyers wanted to file lawsuits under state lawnTake advantage of joint and several liabilitynEasier to

14、hold accountants liable for ordinary negligencenThis act requires class action lawsuits of 50 or more parties to be filed under federal courts Burden of Proof on PlaintiffnShow a damage or lossnNecessary privity or third party beneficiary relationshipnF/S are misleadingnRelied on F/SnF/S were direct

15、 cause of lossnAccountant was negligent or worseDefenses for AccountantnNo standing or privitynF/S not misleadingnAudit was in accordance with GAAS performed with due carenPlaintiff did not rely on F/SnLoss caused by something elsenContributory negligence-plaintiff contributed to lossnPlaintiff did

16、not suffer a real lossForeign Corrupt Practices Act of 19771.Requires a company to keep reasonable records to allow fair presentation of F/S.2.Requires a company to devise a system of internal controls3.Prohibits bribes to foreign officials4.Administered by the SEC for 1&2 aboveStatutory Law Liabili

17、tynForeign Corrupt Practices ActnSEC acts of 33 and 34nViolations of internal revenue codeSECnSEC 33-prohibits fraudulent acts related to initial offerings of stock to the public.nSEC 34-prohibits fraudulent acts related to subsequent trading of stocks.nGave power to establish accounting rulesnRelie

18、s on accounting profession to set standardsSecuritities Act 1933 nCover public offerings of securitiesnRequires filing of registration statementnRegulation S-X requires annual audited F/S and interim unaudited F/SnRegulation S-K requires disclosures and other supplemental informationExchange Act 193

19、4nRegulates Trading of SecuritiesnCompanies with$10 Million in Assets or more than 500 stockholders required to registernRequires the following reportsnForm 10K Annual ReportnForm 10Q Quarterly ReportnForm 8K Special Event ReportnEDGAR electronic data gathering,analysis and retrieval systemLiability

20、 under 1933 ActnSection 11 allows all purchasers to suenAccountants are considered experts on F/S information on the prospectus nAccountants have additional burden as expertnShifts burden of proof to accountantnAccountants are given safe harbor for interim information on forecastsLiability under 193

21、3 Act Cont.nStatute of LimitationsnWithin 1 year of discovery of misstatementnOr within 3 years of offeringnDue Diligence DefensenCausation DefensenSection 17 Fraud unlawful under actnSection 24 set criminal liability for filing misleading F/S;fines and prisonLiability Under 1934 ActnRule 10b-5 Anti

22、fraudnUnlawful to defraud buyer/seller securities publicly traded on a national marketnMust prove scienter(intent to deceive)nSection 18 Civil Liability nPersons making false or misleading statements are liable to persons that suffer a loss from relying of F/SnAuditor must prove good faith,no knowle

23、dge of misleading statements.nSection 32 Criminal Liability fines up to$10,000 and imprisonment of up to 5 years.Liability Under the Acts nSEC 33SEC 34nProve damage or lossSamenAny purchaser can suepurchaser or seller can suen Does not have to show reliance Show reliance on F/Son F/Sn Not required t

24、o show F/S Show F/S caused losscaused lossn Does not have to show CPAShow CPA had was negligent scienter intent to deceive Defense for accountant:SEC 33 SEC 34Due diligence Acted in Caused by something else good faith 1.The accountant has the burden of proof.2.Statute of limitations is 12 months or

25、within 3.3 years of public offering SEC SanctionsThe SEC has the power in certain circumstancesto sanction or suspend practitioners from doingaudits for SEC companies.Rule 2(e)of the SECs Rules of Practice says:SEC SanctionsThe commission may deny,the privilege ofappearing or practicing before it in

26、 any way toany person who is found by the commission(1)not to possess the requisite qualifications torepresent others,or(2)to be lacking in characteror integrity or to have engaged in unethical orimproper professional conduct.Racketeer Influenced andCorrupt Organization ActThis act allows an injured

27、 party to seek treble(triple)damages and recovery of legal feesin cases where it can be demonstratedthat the defendant was engaged in a“pattern of racketeering activity.”Criminal LiabilityCPAs can be held liable undercriminal liability for accountants.CPAs can be found guilty for criminalaction unde

28、r both federal and state laws.Protecting Individual CPAsfrom Legal Liability ExampleDeal only with clients possessing integrityHire qualified personnelFollow the standards of the professionMaintain independenceProtecting Individual CPAsfrom Legal Liability ExampleUnderstand the clients businessPerfo

29、rm quality auditsDocument the work properlyObtain an engagement and a representation letterMaintain confidential relationsProtecting Individual CPAsfrom Legal Liability ExampleCarry adequate insuranceSeek legal counselChoose a form of organization with limited liabilityExercise professional skepticismEnd of Chapter 5演讲完毕，谢谢观看！