Transcript No Slide Title

Click your mouse anywhere on the screen to advance the
text in each slide. After the starburst appears, click a
blue triangle to move to the next slide or previous slide.
39
Business Law and the Legal Environment for a New Century
Alternate Edition
Quote of the Day
“You can’t blame money for what it
does to people. The evil is within
the people, and the money is the
peg they hang it on. They go wild
for money when they’ve lost their
other values.”
Ross MacDonald, American novelist
writing in The Moving Target
39
Business Law and the Legal Environment for a New Century
Alternate Edition
Introduction
 The accounting profession is in a crisis
for several reasons, including:
• Savings and Loan Crisis
• Unrealistic Expectations
• Competition
39
Business Law and the Legal Environment for a New Century
Alternate Edition
Audits
 Conducting audits is a major role of
accountants.
 In the audit process, the accountant
verifies a sample of transactions.
 Verification is done in two ways:
• Vouching – beginning with a transaction in
the books, trace backwards to make sure
the original data supports it.
• Tracing – beginning with a data entry, trace
it forward to make sure it has been properly
recorded at each stage.
39
Business Law and the Legal Environment for a New Century
Alternate Edition
Opinions
 After an audit, the accountant issues an
opinion.
• Unqualified Opinion – most favorable report;
financial statement matches true condition.
• Qualified Opinion -- financial statement is
generally accurate, but there is an unresolved
issue.
• Adverse Opinion -- financial statement is not
accurate; places the company in a bad position
• Disclaimer of Opinion – issued when the
auditor does not have enough information to
form an opinion. Cannot be used when the
auditor knows, but doesn’t want to tell.
39
Business Law and the Legal Environment for a New Century
Alternate Edition
Negligence
 An accountant is liable for negligence to
a client who can prove both of the
following elements:
• The accountant breached his duty to his
client by failing to exercise the degree of
skill and competence that an ordinarily
prudent accountant would under the
circumstances.
• The accountant’s violation of duty caused
harm to the client.
39
Business Law and the Legal Environment for a New Century
Alternate Edition
Fraud and Breach of Trust
 An account is liable for fraud if:
• she makes a false statement of fact,
• she either knows it is not true or recklessly
disregards the truth, and
• the client justifiably relies on the statement.
 Accountants have a legal obligation to:
• keep all client information confidential, and
• use client information only for the benefit of
the client.
39
Business Law and the Legal Environment for a New Century
Alternate Edition
Liability to Third Party
 Determined by state law:
• Ultramares Doctrine --accounts who fail to
exercise due care are liable to a third party
only if they know that the third party (1) will
see their work produce and (2) will rely on the
work product for a particular known purpose.
• Foreseeable Doctrine --The court held that an
accountant who fails to exercise due care is
liable to a third party if (1) it was foreseeable
that the third party would receive financial
statements from the accountant’s client, and
(2) the third party relied on these statements.
39
Business Law and the Legal Environment for a New Century
Alternate Edition
Liability to Third Party (cont’d)
• Restatement Doctrine -- accountants who
fail to exercise due care are liable to (1)
anyone they knew would rely on the
information and (2) anyone else in the
same class.
 An accountant who commits fraud is
liable to any foreseeable user of the
work product who justifiably relied on it.
39
Business Law and the Legal Environment for a New Century
Alternate Edition
Securities Act of 1933
 Under §11 of the 1933 Act, auditors are
liable for any material misstatement or
admission in the financial statements
that they prepare for a registration
statement.
 Auditors can avoid liability if they show
that they made a reasonable
investigation (due diligence).
39
Business Law and the Legal Environment for a New Century
Alternate Edition
Securities Act of 1934
 Liability for Inaccurate Disclosure in a
Required Filing
• Under §18, an auditor who makes a false or
misleading statement in a required filing is
liable to any buyer or seller of the stock
who has acted in reliance on the statement
 Fraud
• Under §10(b), an auditor is liable for
making (1) a misstatement or omission of a
material fact, (2) knowingly or recklessly (3)
that the plaintiff relies on in purchasing or
selling security.
39
Business Law and the Legal Environment for a New Century
Alternate Edition
Aiding and Abetting
 The SEC can prosecute those who aid
and abet others in making untrue
statements in connection with the
purchase or sale of a security.
 Under §10(a), auditors who suspect
that a client has committed an illegal act
must ensure that the client’s board of
directors is notified.
39
Business Law and the Legal Environment for a New Century
Alternate Edition
Type of Liability
 Joint and Several Liability
• Congress recently amended the 1934 Act
to provide that accountants are liable jointly
and severally only if they knowingly violate
the law. Otherwise, the defendants are
proportionally liable.
 Criminal Liability
• Offenses which may be criminal offenses
include willful violations of the 1933 or 1934
Acts, wrongdoing in the preparation of
income tax returns, violations of state
securities statutes.
39
Business Law and the Legal Environment for a New Century
Alternate Edition
The Accountant-Client
Relationship
 An accountant’s relationship with his
client may create difficult situations, as
the accountant would lose a client if the
business fails. Yet, an accountant who
practices unethical or improper conduct
(such as not reporting found problems)
may be banned from practice.
39
Business Law and the Legal Environment for a New Century
Alternate Edition
Accountant-Client Privilege
 Means that in some cases, information
shared between an accountant and
client may be protected from disclosure.
• Working Papers – Accountants own the
draft materials they are preparing for a
client, but the client controls who sees
them.
39
Business Law and the Legal Environment for a New Century
Alternate Edition
“Over the past decade,
accountants have been shocked at
the large number of liability suits
against members of their
profession. Now, more than ever,
accountants need to be aware of
their potential legal liability.”
39
Business Law and the Legal Environment for a New Century
Alternate Edition