3air_im17 - 149 CHAPTER 17 Legal Liability LEARNING...

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CHAPTER 17 Legal Liability LEARNING OBJECTIVES Review Checkpoints Cases and Problems 1. List some causes, errors, and reasons that can get auditors into civil and criminal legal trouble. 1, 2, 3 34, 35 2. Specify some of the features of the laws and regulations that affect the practice of public accounting. 4, 5 45 3. Specify the characteristics of accountants' liability under common law, and cite some specific case precedents. 6, 7, 8, 9 36, 37, 38, 39, 40 4. Specify the characteristics of accountants liability under statutory law. 10,11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23 41, 42, 43, 44 * Ashton Behavioral Case 30 POWERPOINT SLIDES PowerPoint slides are included on the website. Please take special note of: * Four Elements of Negligence * Due Care to Whom? SOLUTIONS FOR REVIEW CHECKPOINTS 17.1 In a class action lawsuit, a few aggrieved persons with small losses can bring suit on behalf of a large group of similar persons, collectively having large losses (as in a securities offering). Large lawsuits often result in large damage awards, and many lawyers are willing to take suit plaintiffs on a contingency fee bases, that is for 25% - 40% of the amount awarded. Such fees are very lucrative for lawyers, and probably less lucrative for their clients. Anyway, the losses loom large for CPAs and their insurance companies. 17.2 Failure to report known departures from accounting principles, including misinterpretation of accounting principles. Failure to conduct audits properly, including (a) misinterpretation of auditing standards, and (b) faulty implementation of auditing procedures. Failure to detect management fraud, fraudulent financial reporting. Actual involvement in fraud. Also, business failure by clients after rendering an unqualified audit 149
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150 report. 17.3 Lawsuits related to tax practice, 35 percent. The Foreign Corrupt Practices Act (FCPA) prohibits bribery of foreign officials in order to obtain business. The FCPA requires companies to maintain accounting and internal control standards sufficient to (1) keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company and (2) provide reasonable assurance that four specific control objectives are satisfied. The apparent original purpose of RICO was to prosecute organized criminal activity. It is used against accountants as a lever for raising the risk in a civil lawsuit. If plaintiffs can allege and prove a "pattern of racketeering activity," which can be only involvement in malpractice and using the mails and telephone (things accountants do all the time), the threat of triple damages, court costs, and attorney fees becomes real. The test of only two events and a ten year period is not hard to impose on accountants. Also, no accountant wants to be labeled a "racketeer." 17.4 The plaintiff in a common law action for civil damages essentially bears all the burdens of affirmative proof. He must prove damages, that the
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3air_im17 - 149 CHAPTER 17 Legal Liability LEARNING...

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