chapter 20 legal liability mcgraw-hill/irwincopyright © 2012 by the mcgraw-hill companies, inc. all...
TRANSCRIPT
Chapter 20Chapter 20
Legal LiabilityLegal Liability
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Historical PerspectiveHistorical Perspective
1970
Claims against auditors were
relatively uncommon before the 1970’s.
19901980
Due to a slump in the economy in the early 1970’s and the recession of the 1980’s, it became more common for
auditors to be sued.
The recession of 1990-1992 led to another upsurge in litigation against auditors.
2002
Due to several high-profile frauds, Congress refocused attention on auditors in the Sarbanes-Oxley Act of 2002.
Intro
2010
Global credit crisis leads to the Dodd-Frank Act of 2010 and increases scrutiny into auditing profession again.
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OverviewOverview
Two Classes of Law
Common Law
Case law developed over time by judges
Statutory Law
Written law enacted by the
legislative branch of government
LO# 2
20-3
Common Law—Clients Common Law—Clients
Requires Due Care
Types of Liability to the Client
May be held liable for breach of
contract
•Negligence•Gross negligence•Fraud (acting with knowledge and intent to deceive)
LO# 3
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Common Law—Third Parties Common Law—Third Parties
Near Privity 3rd parties whose
relationship with the CPA approaches
privity.
Foreseen 3rd Parties3rd parties whose
reliance should be foreseen, even if the
specific person is unknown to the auditor.
Reasonably Foreseeable 3rd Parties
3rd parties whose reliance should be
reasonably foreseeable, even if the specific
person is unknown to the auditor.
LO# 4
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LO# 4
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FraudFraud
Third Party Must Prove
1. A false representation by the CPA.2. Knowledge or belief by the CPA that the representation was
false.3. The CPA intended to induce the 3rd party to rely on the false
representation.4. The 3rd party relied on the false representation.5. The 3rd party suffered damages.
LO# 4
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Statutory Liability Statutory Liability
The Securities Act of 1933
The Securities Exchange Act of
1934
Three major statutes provide sources of statutory liability for auditors:
Sarbanes-Oxley Act of 2002
LO# 5
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Securities Act of 1933Securities Act of 1933
Third Party Must Prove
1. The 3rd party suffered losses by investing in the registered security.
2. The audited financial statements contained a material omission or misstatement.
LO# 5
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Securities ExchangeSecurities ExchangeAct of 1934Act of 1934
Third Party Must Prove
1. A material, factual misrepresentation or omission.2. Reliance on the financial statements.3. Damages suffered as a result of reliance on the financial
statements.4. Scienter (gross negligence or recklessness may be enough).
LO# 6
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Private Securities Litigation ReformPrivate Securities Litigation ReformAct of 1995, Securities Litigation Uniform Act of 1995, Securities Litigation Uniform
Standards Act of 1998, and the Class Standards Act of 1998, and the Class Action Fairness Act of 2005Action Fairness Act of 2005
Private Securities Litigation Reform Act
of 1995
Provides for proportionate liability for defendants based
on percentage of responsibility and a specific statement of
fraud at the beginning of the case
Securities Litigation Uniform Standards
Act of 1998
Prevents plaintiffs from seeking to evade
the protections that Federal law provides
against abusive litigation by filing suit in State, rather than
Federal Court
LO# 7
Class Action Fairness Act of 2005
Expands federal jurisdiction to include
multistate class actions where there is more than $5 million in dispute. Expected
to help in more consistent dismissal of dubious claims.
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Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Act of 2002
Most sweeping securities law
since 1934
Most sweeping securities law
since 1934
Creation of PCAOBCreation of PCAOB
Stricter independence rules
Stricter independence rules
Audits of internal controls
Audits of internal controls
Increased reporting responsibilities
Increased reporting responsibilities
LO# 8
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LO# 5-8
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SEC and PCAOB Sanctions SEC and PCAOB Sanctions
Suspend Practicing Privilege Impose
FinesRemedial Measures
LO# 9
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Foreign Corrupt PracticesForeign Corrupt PracticesAct (FCPA)Act (FCPA)
An auditor may be subject to
administrative proceedings, civil liability, and civil
penalties.
Passed in 1977 in response to the discovery of bribery and other misconduct on the part of
more than 300 American companies.
LO# 10
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Racketeer Influenced and Corrupt Racketeer Influenced and Corrupt Organizations Act (RICO)Organizations Act (RICO)
RICO provides for civil and
criminal sanctions for certain illegal
acts.
Passed in 1970 to combat the infiltration of legitimate businesses by organized crime.
LO# 11
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Criminal LiabilityCriminal Liability
Gross Negligence
Fraud
Auditors can be held criminally liable under the laws discussed in the previous section.
Criminal prosecutions require that some form of criminal intent be present, such as fraud. However, gross negligence can also
be deemed criminal.
LO#
8 & 12
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End of Chapter 20End of Chapter 20
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