Chapter 45

Chapter 45 - Chapter 45 Chapter Accountant’s Legal...

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Unformatted text preview: Chapter 45: Chapter Accountant’s Legal Liability Accountant’s & AICPA Ethics BUL 3350 - Chapter 45 1 Topics Covered in this Chapter A. Common Law B. Federal Securities Law BUL 3350 - Chapter 45 2 Common Law Common Contract Liability - the employment contract between an accountant and her client is subject to the general principles of contract law. of Explicit Duties - the accountant is Explicit bound to perform all the duties she expressly agrees to provide. expressly Implicit Duties - the accountant Implicit impliedly agrees to perform the contract in a competent and professional manner. in BUL 3350 - Chapter 45 3 Contract Liability Beneficiaries - contract liability extends Beneficiaries to the client/contracting party and to third-party beneficiaries (noncontracting parties intended by the contracting parties to receive the primary benefit under the contract). under Breach of Contract - general contract Breach law principles apply. law BUL 3350 - Chapter 45 4 Tort Liability A tort is a private or civil wrong or injury tort other than a breach of contract. other Negligence - an accountant is liable for Negligence failing to exercise the degree of care a reasonably competent accountant would exercise under the circumstances; most courts have extended an accountant's liability for negligence beyond the client and third-party beneficiaries to foreseen third parties. third BUL 3350 - Chapter 45 5 Accountants’ Liability to Third Parties for Accountants’ Negligent Misrepresentation Negligent Reasonably Foreseeable Plaintiffs Foreseen Users Privity (Primary Benefit Test) Third parties intended by the account and client to receive primary benefit under contract Those who the accountant knew would use the work or those who use the work for a purpose known to the accountant Third parties who reasonably and foreseeably rely BUL 3350 - Chapter 45 6 Tort Liability Fraud - an accountant who commits a Fraud fraudulent act is liable for both compensatory and punitive damages to any person who he should have reasonably foreseen would be injured; a fraudulent act is a false representation of fact that is material, is made with knowledge of its falsity and with the intention to deceive, and is justifiably relied on. relied BUL 3350 - Chapter 45 7 Criminal Liability State law imposes criminal liability on State accountants for willfully certifying false documents, altering or tampering with accounting records, using false financial reports, giving false testimony, and committing forgery. committing BUL 3350 - Chapter 45 8 Client Information Working Papers - an accountant is considered Working the owner of his working papers but may not disclose their contents unless the client agrees or a court orders the disclosure. or Accountant–Client Privilege - not recognized Accountant–Client generally by the common law or Federal law, although some States have adopted statutes granting some form of privilege; accountants authorized to practice before the IRS have privilege for tax advice given their clientprivilege taxpayers with respect to Internal Revenue taxpayers Code matters. Code BUL 3350 - Chapter 45 9 Federal Securities Law 1933 Act Civil Liability - Section 11 imposes express Civil civil liability upon accountants if the financial statements they prepare or certify for a registration statement contain any untrue statement or omit any material fact, unless the accountant proves her due diligence defense, which requires that the accountant had, after reasonable investigation, reasonable grounds to believe and did believe that the financial statements were true, complete, and accurate. statements BUL 3350 - Chapter 45 10 Federal Securities Law 1933 Act Criminal Liability - a willful violator of Criminal Section 11 is subject to fines of not more than $10,000 and/or imprisonment of not more than five years. more BUL 3350 - Chapter 45 11 1934 Act Section 18 - imposes express civil liability on Section an accountant who knowingly makes any false or misleading statement about any material fact in any report, document, or registration filed with the SEC. filed Rule 10b–5 - an accountant is civilly liable Rule under this rule if he acts with scienter in scienter making oral or written misstatements or omissions of material fact in connection with the purchase or sale of a security. the BUL 3350 - Chapter 45 12 1934 Act Criminal Liability - a willful violator of either Criminal Section 18 or Rule 10b–5 is subject to fines of not more than $1 million and/or imprisonment of not more than ten years. of Audit Requirements - auditors must establish Audit procedures capable of detecting material illegal acts, identifying material related party transactions, and evaluating whether there is a substantial doubt about the issuer's ability to continue as a going concern during the next fiscal year. fiscal BUL 3350 - Chapter 45 13 Sarbanes-Oxley Act This Act provides for the establishment of the five-member Public Company Accounting Oversight Board. The duties of the Board include (1) registering public accounting firms that prepare audit reports for issuers; (2) overseeing the audit of public companies; (3) establishing audit report standards and rules; and (4) inspecting, investigating, and enforcing compliance on the part of registered public accounting firms and their associated persons. The Act also prohibits accounting firms from performing eight specified non-audit services for audit clients, including bookkeeping or other services related to the accounting records or financial statements; financial information systems design and implementation, appraisal or valuation services; fairness opinions; management functions or human resources; and actuarial services. Accounting firms may perform other non-audit services not expressly forbidden by the Act if the company’s audit committee grants prior approval and the approval by the audit committee is disclosed to investors in periodic reports. Auditors must report directly to the company’s audit committee and make timely disclosure of accounting issues concerning (1) critical accounting policies and practices used in the audit; (2) alternative treatments and their ramifications within generally accepted accounting principles that have been discussed with management officials and the treatment preferred by the auditor; and (3) other material written communications between the auditor and management. BUL 3350 - Chapter 45 14 Accountants’ Liability under Federal Accountants’ Securities Law Securities Section 11 1933 Act Conduct Registration statement containing material misstatement or omission Negligence Yes No No Section 18 1934 Act False or misleading statements in a document filed with SEC Knowledge or bad faith Yes Yes No Rule 10b-5 1934 Act Deception or material misstatement or omission Scienter Yes Yes No Fault Plaintiff’s knowledge is a defense Reliance required Privity required BUL 3350 - Chapter 45 15 AICPA Ethics Code of Professional Conduct • Two Sections: Principles and Rule • • The 6 Principles The 11 Rules of Conduct BUL 3350 - Chapter 45 16 Code of Professional Conduct The 6 Principles 1. 2. 3. 4. Responsibilities The Public Interest Integrity Objectivity & Independence* 5. Due Care 6. Scope & Nature of Services* The 11 Rules of Conduct 1. 2. 3. 4. 5. 6. 7. 8. 9. Independence Integrity & Objectivity* General Standards* Compliance w/Standards* Accounting Principles* Confidential Client Information Contingent Fees Acts Discreditable* Advertising & Other Forms of Solicitation 10. Commissions & Referral Fees* 11. Form of Organization & Name** 17 * “Principles” marked apply only to members in public practice – the rest apply to all members. * “Rules” marked apply to all members ** “Rules” marked applies in part (referrals) to all members and in part (commissions) only to members in public practice. The remaining “Rules” apply only to members in public practice. BUL 3350 - Chapter 45 The Six Principles 1. 2. 3. 4. Responsibilities. Members should exercise sensitive professional and moral judgments when carrying out their professional responsibilities. The Public Interest. Integrity. Members should act to benefit the public interest, honor the public trust, and demonstrate commitment to professionalism. Members should perform all professional responsibilities with the highest integrity to maintain public confidence. Objectivity & Independence. A member should maintain objectivity and be free of conflicts of interest. A member in public practice should be independent in fact and appearance when providing attestation services. 5. Due Care. A member should follow the profession’s technical and ethical standards, strive for improved competence and quality services, and discharge professional responsibility to the best of the member’s ability. 6. Scope & Nature of Services. A member in public practice BUL 3350 - Chapter 45 should follow the Principles of the Code of Professional Conduct in determining the nature and scope of services. 18 ...
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