Transcript CHAPTER 4 -LEGAL LIABILITY

CHAPTER 4 -LEGAL
LIABILITY
CHANGED LEGAL
ENVIRONMENT
• EXPANDING LIABILITY
– AWARENESS OF CPAS AS DEFENDENTS
– GREATER COMPLEXITY OF
ACCOUNTING AND AUDITING
– DEEP POCKETS
– CONTINGENT FEES
– WILLINGNESS TO SETTLE
– TRIAL BY PEERS
FAILURES
• BUSINESS FAILURES
– BAD JUDGMENTS, POOR BUSINESS
• AUDIT FAILURES
– BAD AUDITING
• AUDIT RISK
– RISK OF REACHING WRONG
CONCLUSION ABOUT F/S
LEGAL CONCEPTS
• PRUDENT PERSON CONCEPT
– DUTY TO EXERCISE SKILL AS IS
COMMON TO MEMBERS OF PROFESSION
– DUTY FOR GOOD FAITH, NOT
INFALLIBILITY
• LACK OF PRIVILEDGED
COMMUNICATION
• NEGLIGENCE AND FRAUD
– ORDINARY FRAUD
• FAILURE TO EXERCISE REASONABLE CARE
– GROSS NEGLIGENCE
• FAILURE TO EXERCISE EVEN SLIGHT CARE
– CONSTRUCTIVE FRAUD
• RECKLESSNESS WITHOUT INTENTION
– FRAUD
• MISSTATEMENT IS MADE WITH INTENT
• CONTRACT LAW
– BREACH ON CONTRACT
– THIRD-PARTY BENEFICIARY
• COMMON LAW
– LAW DEVELOPED THROUGH COURT
DECISIONS (PRECIDENT CASES)
– VARIES FROM STATE TO STATE
• STATUTORY LAW
– LAWS PASSED BY GOVERNMENTAL UNITS
– FEDERAL STATUTES
• 1933 AND 1934 SECURITIES ACTS
• ICC, FTC
– STATE STATUTES
• APPORTIONMENT OF LIABILITY
– JOINT AND SEVERAL
– SEPARATE AND PROPORTIONATE LIABILITY
LIABILITY TO CLIENTS
• BREACH OF CONTRACT
• TORT ACTION BASED ON NEGLIGENCE
– LEVEL OF CARE REQUIRED
– FAILURE TO MEET GAAS
• DEFENSES
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LACK OF DUTY
NONNEGLIGENT PERFORMANCE
CONTRIBUTORY NEGLIGENCE
LOSS NOT CAUSED BY NEGLIGENCE
LIABILITY TO THIRD
PARTIES
• PRIVITY OF CONTRACT
– ULTRAMARES V TOUCHE (1931) NY
– NAMED IN CONTRACT
• FORESEEN USERS
– RESTATEMENT OF TORTS
– RUSCH FACTORS (1968)
• FORESEEABLE USERS
– ROSENBLUM V ADLER (1984) NJ
(REVERSED)
LIABILITY UNDER FEDERAL
SECURITIES LAWS
• SECURITIES ACT OF 1933
– INITIAL PUBLIC OFFERINGS
• ANY INITIAL PURCHASER
• 3RD PARTY RELIANCE NOT NECESSARY
• AUDITOR MUST SHOW NONNEGLIGENCE
• SECURITIES ACT OF 1934
– SECONDARY MARKETS
– GROSS NEGLIGENCE OR FRAUD
– SCIENTER (KNOWLEDGE)
• RICO
CRIMINAL LIABILITY
• KNOWINGLY BEING INVOLVED IN
DECEPTION
– US V SIMON (CONTINENTAL VENDING)
– US V WEINER (EQUITY FUNDING)
– ESM GOVT V A. GRANT
PROFESSION’S RESPONSE
TO LIABILITY
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STANDARD SETTING TO MEET NEEDS
REQUIREMENTS TO PROTECT AUDITORS
PEER REVIEW REQUIREMENTS
OPPOSE LAWSUITS
EDUCATION OF USERS
SANCTION MEMBERS
LOBBY FOR CHANGES
INDIVIDUAL RESPONSE TO
LIABILITY
• HONEST CLIENTS
• HIRE QUALIFIED PERSONNEL AND
ADEQUATE TRAINING
• FOLLOW STANDARDS
• MAINTAIN INDEPENDENCE
• UNDERSTAND BUSINESS
• DOCUMENT WORK THROUGHLY
• ENGAGEMENT LETTERS