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Unformatted text preview: Chapter 5 Legal Liability The legal liability section is difficult to teach. We want the students to have a flavor for the auditor's legal responsibility without overwhelming them with material to memorize that they are unlikely to remember. The legal environment is also significantly different for individuals, depending on their employment choice. Internal and governmental auditors have little, if any, concern, while those who work for national CPA firms are greatly affected by SEC law. Smaller CPA firm employees are more concerned with client and third party common law. We also don't want students to believe that legal liability is the dominant consideration in an auditor's life. The following are the major things we try to cover: Chapter opening vignette The changed legal environment Distinction among business failure, audit failure, and audit risk Prudent person concept Review of definitions Liability to clients Liability to third parties under common law Civil liability - Securities Act of 1933 Civil liability - Securities Exchange Act of 1934 Criminal liability Profession's response to liability Summary of chapters 1, 2, 4, and 5 Chapter Opening Vignette - “It Takes the Net Profit from Many Audits to Offset the Cost of One Lawsuit” This vignette is fairly straightforward. It shows that an auditor can get sued even when he or she does everything right. In addition, once the suit is filed, the cost of riding it out is immense. Once these realities are grasped, an auditor should be convinced and motivated to be extremely careful to avoid high-risk clients and to ensure that auditing standards are complied with. The vignette raises an important economic issue as well: the relationship between risk and fees. If auditors are too willing to “low-bid” fees to get work, and their average fees across all clients are low, then their fee structure may not be sufficient to justify the risks they are taking. The vignette can also be used to discuss the nonmonetary costs of litigation. It is important for students to get some feel for the stress that is placed on individuals and the practice as a whole by a lawsuit. 5-1 The Changed Legal Environment (page 112) It is useful to show students T-5-1 related to the history of legal liability for CPA firms. It gives them a perspective that it is fairly recent that liability has been a problem for CPAs. (See T-5-1) Next we ask students to compare the liability of CPAs and other professionals such as physicians, attorneys, and automobile manufacturers. (They are not substantially different.) It might be helpful to bring a recent article from the newspaper or business journal about a huge judgment or settlement in some other field....
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This note was uploaded on 01/23/2010 for the course ACCOUNTING auditing taught by Professor Pro-abuel-ezz during the Spring '10 term at Cairo University.
- Spring '10