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PowerPoint_Chapter_23 - Kulper - Econ 189 Kulper 1 •...

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Unformatted text preview: Kulper - Econ 189 Kulper 1 • Conducting audits is a major role of Audits 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. Kulper - Econ 189 Kulper 2 • 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. Kulper - Econ 189 Kulper 3 Opinions Sarbanes­Oxley Act of 2002 • Public Company Accounting Oversight Board – • • ensures investors receive accurate and complete financial information. Reports to Audit Committee – Auditors must communicate regularly with audit committees of its clients. Consulting Services – prohibits accounting firms that audit public companies from providing consulting services to their audit clients on topics such as bookkeeping, financial information systems, human resources, and legal issues (unrelated to the audit). Kulper - Econ 189 Kulper 4 Sarbanes­Oxley Act of 2002 • Conflicts of Interest – Accounting firms cannot audit a company whose officer has worked for the firm in the past year. • Term Limits on Audit Partners – A lead audit partner cannot work for a client for more than five years. Kulper - Econ 189 Kulper 5 Liability to Clients • 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. YOU BE THE JUDGE: Oregon Steel Mills, Inc. v. Coopers & Lybrand, LLP (Bad advice on sale of stock transaction; delayed sale; damages of $35M) Kulper - Econ 189 Kulper 6 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. – keep all client information confidential, and – use client information only for the benefit of the client. Kulper - Econ 189 Kulper 7 • Accountants have a legal obligation to: • Negligence: 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. Liability to Third Party (Ellis v. Grant Thornton: Negligence by audit partner; • Fraud: an accountant who commits fraud is liable to any foreseeable user of the work product who justifiably relied on it. Kulper - Econ 189 Kulper audit opinion relied on by 3rd party in decision to take job as bank’s president) 8 Securities Act of 1933 • Under §11 of the 1933 Act, auditors are liable for any material misstatement or omission in the financial statements that they prepare for a registration statement. • Auditors can avoidliability if they show that they made a reasonable investigation (due diligence). Kulper - Econ 189 Kulper 9 • Fraud Securities Act of 1934 • Whistleblowing – 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. – Auditors who suspect that a client has committed an illegal act must ensure that the client’s board of directors is notified. Kulper - Econ 189 Kulper 10 • Joint and Several Liability Type of Liability • Criminal 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. – 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. Kulper - Econ 189 Kulper 11 • An accountant would lose a client if the The Accountant­Client Relationship • • business fails, yet, an accountant who practices unethical or improper conduct (such as not reporting found problems) may be banned from practice. SEC prohibits accountants from owning stock or having a financial interest in a company that their firm audits. The Sarbanes­Oxley Act prohibits accounting firms from providing consulting services separate from the auditing services provided to public companies. Kulper - Econ 189 Kulper 12 Accountant­Client 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 them. – The accountant cannot show the working papers to anyone without the client’s permission and must allow the client access to the working papers. 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