审计的合法义务（40页）ppt课件

1、Legal LiabilityChapter 5$2 Billion paid in S&L LawsuitsErnst & Young1992$400 millionDeloitte & Touche1994 $312 millionKPMG1994 $187 millionArthur Andersen1993 $82 millionLawsuits Against AuditorsExpectation gap on detection of fraudAuditor sued in civil courtBreach of contractTort actions for neglig

2、enceCriminal 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 th

3、eir 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.B

4、usiness 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 represe

5、nts the 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 LiabilityFederalsecuri

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

7、auditors work must be shown as negligent.Negligence (ordinary) is the lack of reasonable care. What would a prudent auditor do in the same circumstances. Following GAAS is not always enough reasonable careGross Negligence is the lack of minimum care.Constructive fraudFraud - an intentional act to de

8、ceive.Relationship to Sue for Ordinary Negligence Privity- party to a contractMust have privity to sue for breach of contractContract between auditor and clientThird Party Beneficiary (standing)InvestorsCreditorsStanding depends on state common law. Third Party Beneficiary - StandingLimited exposure

9、 several statesOnly liable if the third party was specifically known to the auditor and that the third party would be relying on the F/SRestatement of Torts majority of statesLiable to foreseen third party users Reasonably Foreseeable Users Wisconsin and MississippiAlmost unlimited liability to any

10、possible users of the F/S.Liability and StandingGross negligence and fraud are a basis for liability in tort regardless of privity or standingOrdinary negligence requires a privity or third party beneficiary relationshipLegal Terms AffectingCPAs LiabilityOther termsCommonlawStatutorylawJoint and sev

11、eralliabilitySeparate andproportionateliabilityAuditors LiabilityJoint and several liability legal - Deep Pocketsmany state laws allow third party persons to recover damages from the person with the deepest pocketsProportionate liability - shared responsibility of the damages based on fault Private

12、Litigation Reform Act 1995 Federal lawsuits under SEC1934 ActSome states have similar actsUses proportionate liabilityResponsibility divided among partiesIf some of the defendants are insolvent, may increase solvent defendants share by 50% of what they owe.Joint and severally liable to small investo

13、r plaintiffs (under $200,000 and lost 10% of net worth)Knowingly committing a SEC violation can make defendant joint and severally liableSecurities Litigation Uniform Standards Act 1998Lawyers wanted to file lawsuits under state lawTake advantage of joint and several liabilityEasier to hold accounta

14、nts liable for ordinary negligenceThis act requires class action lawsuits of 50 or more parties to be filed under federal courts Burden of Proof on PlaintiffShow a damage or lossNecessary privity or third party beneficiary relationshipF/S are misleadingRelied on F/SF/S were direct cause of lossAccou

15、ntant was negligent or worseDefenses for AccountantNo standing or privityF/S not misleadingAudit was in accordance with GAAS performed with due carePlaintiff did not rely on F/SLoss caused by something elseContributory negligence - plaintiff contributed to lossPlaintiff did not suffer a real lossFor

16、eign Corrupt Practices Act of 1977Requires a company to keep reasonable records to allow fair presentation of F/S.Requires a company to devise a system of internal controlsProhibits bribes to foreign officialsAdministered by the SEC for 1 & 2 aboveStatutory Law LiabilityForeign Corrupt Practices Act

17、SEC acts of 33 and 34Violations of internal revenue codeSECSEC 33 - prohibits fraudulent acts related to initial offerings of stock to the public.SEC 34 - prohibits fraudulent acts related to subsequent trading of stocks.Gave power to establish accounting rulesRelies on accounting profession to set

18、standardsSecuritities Act 1933 Cover public offerings of securitiesRequires filing of registration statementRegulation S-X requires annual audited F/S and interim unaudited F/SRegulation S-K requires disclosures and other supplemental informationExchange Act 1934Regulates Trading of SecuritiesCompan

19、ies with $10 Million in Assets or more than 500 stockholders required to registerRequires the following reportsForm 10K Annual ReportForm 10Q Quarterly ReportForm 8K Special Event ReportEDGAR electronic data gathering, analysis and retrieval systemLiability under 1933 ActSection 11 allows all purcha

20、sers to sueAccountants are considered experts on F/S information on the prospectus Accountants have additional burden as expertShifts burden of proof to accountantAccountants are given safe harbor for interim information on forecastsLiability under 1933 Act Cont.Statute of LimitationsWithin 1 year o

21、f discovery of misstatementOr within 3 years of offeringDue Diligence DefenseCausation DefenseSection 17 Fraud unlawful under actSection 24 set criminal liability for filing misleading F/S; fines and prisonLiability Under 1934 ActRule 10b-5 AntifraudUnlawful to defraud buyer/seller securities public

22、ly traded on a national marketMust prove scienter (intent to deceive)Section 18 Civil Liability Persons making false or misleading statements are liable to persons that suffer a loss from relying of F/SAuditor must prove good faith, no knowledge of misleading statements.Section 32 Criminal Liability

23、 fines up to $10,000 and imprisonment of up to 5 years.Liability Under the Acts SEC 33SEC 34Prove damage or lossSameAny purchaser can suepurchaser or seller can sueDoes not have to show reliance Show reliance on F/Son F/SNot required to show F/S Show F/S caused losscaused lossDoes not have to show C

24、PAShow CPA had was negligent scienter intent to deceive Defense for accountant:SEC 33 SEC 34Due diligence Acted in Caused by something else good faith The accountant has the burden of proof.Statute of limitations is 12 months or within 3 years of public offering SEC SanctionsThe SEC has the power in

25、 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 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 party to seek treble(triple) damages and recovery of