ACC404 ch 20

When violations are detected, the authority to impose sanctions including revoking a firm's registration, monetary penalties up to $15 million per firm, and the appointment of an independent monitor rests with the

PCAOB

Under the Sarbanes-Oxley Act, substantial authority and responsibility to create detailed rules and regulations rests with the

SEC

After the capital markets were shaken by accounting frauds and an accounting crisis, the - Act of 2002 and the - Act (2010) refocused attention on auditor performance, duties, and legal liability.

Sarbanes-Oxley Dodd-Frank

True or false: Catastrophic legal liability is generally believed to be the single greatest threat to large firms and the audit profession.

True

True or false: Several cases have dealt with the issue of whether purchasers of a company's stock on the open market should be foreseen users and can hold auditors liable under Restatement Section 552. Thus far, courts have ruled that Section 552 does not impose a public duty.

True

Under Rule 10b-5, the plaintiff must prove

a material, factual misrepresentation reliance on the financial statements

Reasons given by courts for expanding the scope of an auditor's liability to third parties beyond near privity include the

ability of auditors to obtain insurance against the increased risk ability of auditors to pass increased costs to their clients increased liability of other professionals to nonprivity users of their services

The Sarbanes-Oxley Act grants the PCAOB

ability to conduct investigations concerning acts involving auditors of publicly traded firms that may violate provisions of the Act disciplinary authority over registered public accounting firms and person associated with such firms

To recover against an auditor in a negligence case, the client must prove

actual losses or damages were suffered auditor breached duty by failing to act with due professional care auditor duty to the client to conform to a required standard of care

Under the Foreign Corrupt Practices Act, auditors may be subject to

administrative proceedings civil liability

Despite a study requested by the Dodd-Frank Act, no changes were made to the securities laws to restore liability for and

aiding abetting

Prior to 1994, courts frequently held that an auditor who was not liable as a primary violator of Section 10(b) or Rule 10b-5 could still be held liable for and if the auditor had knowledge and substantially assisted in the primary violation

aiding abetting

Prior to 1994, courts frequently held that an auditor who was not liable as a primary violator of Section 10(b) or Rule 10b-5 could still be held liable for and if the auditor had knowledge and substantially assisted in the primary violation.

aiding abetting

The Private Securities Litigation Reform Act of 1995

amends the Securities Exchange Act of 1934 to provide for proportionate liability reduced auditor liability by creating a "safe harbor" for auditors who detect fraud requires auditors to notify the SEC within one business day when management fails to take action in response to reports of material fraud

Reasons given by courts for expanding the scope of an auditor's liability to third parties beyond near privity include the

assumption that expanded liability will improve auditing procedures lack of fairness of imposing the burden of economic loss on innocent financial statement users

A defense available to auditors sued under Section 11 of the Securities Act of 1933 is the

auditor made a reasonable investigation of the facts regarding the information included in the registration statement

Studies have found that

auditors charge higher fees when exposed to higher litigation risk auditors are more diligent in their audits following litigation on other clients fee increases due to heightened litigation risk result in higher quality audits

Academic studies have found that

based on settlements, it appears investors view the provision of nonaudit services as impairing auditors' independence bankruptcies and regulatory enforcement actions often lead to auditors being included in lawsuits suits against auditors are more common when the accounting failure involves fictitious/overvalued assets or undervalued liabilities/expenses

Under the Credit Alliance case, the accountant must

be aware that a known party is intending to rely on the financial statements have exhibited some conduct linking them to the party be aware that the financial statements will be used for a particular purpose

If an accounting firm is facing suspension by the SEC, the firm may

be barred from taking on new SEC clients for a period of time be subjected to special reviews to ensure alleged problems are fixed

Auditors found guilty in a criminal prosecution may face

both fines and imprisonment

New public offerings of securities are regulated by

both the Securities Act of 1933 and the Securities and Exchange Act of 1934

New public offerings of securities are regulated by Blank

both the Securities Act of 1933 and the Securities and Exchange Act of 1934

Under the Sarbanes-Oxley Act, the SEC Blank______ extend the rules beyond what is required by the Act.

can always

It is generally believed that the single greatest threat to large firms and the audit profession is Blank

catastrophic legal liability

Criminal penalties may be levied against auditors if they

commit illegal acts violate banking and insurance regulations

Case law developed over time by judges who issue legal opinions which become precedent is called law.

common

The jury is permitted to assess the relative fault of the parties under the view of Blank______ negligence.

comparative

Damages that return a plaintiff to a position equivalent to where they would have been in the absence of the auditor's negligence are called Blank______ damages.

compensatory

Extreme, flagrant, or reckless deviation from professional standards of due care is the definition of gross negligence or

constructive fraud

Gross negligence is also known as

constructive fraud

Section 302 of Sarbanes-Oxley directed the SEC to

create rules requiring CEO and CFO certification of financial statements

The U.S. Supreme Court

determined that Rule 10-b5 requires that scienter, or intent to deceive, be present. ruled that an action under Rule 10b-5 may not be maintained by showing that the defendant was negligent

The third stage in the initiation and disposition of audit-related disputes involves activities such as Blank______.

discovery trial preparation filing complaints

Auditors can be sued by clients, investors, or creditors for failure to perform professional services with care.

due professional

Auditors sued under Section 11 of the 1933 Act can use the defense of

due diligence

The Sarbanes-Oxley Act

ended decades of self-regulation by the accounting profession brought about stricter independence rules created the PCAOB

Under Section 11 of the Securities Act of 1933, if a registration statement contained an untrue statement of a material fact Blank______ who prepared or certified any part of the statement can be liable.

every accountant

The Class Action Fairness Act (CAFA) of 2005

expands federal jurisdiction to include most multistate class actions with more than $5 million in dispute

The Class Action Fairness Act (CAFA) of 2005 is based in part on legal experts' belief that judges are more likely than judges to dismiss dubious claims.

federal state

Under common law, an auditor can be held liable to clients for

gross negligence fraud breach of contract

In the Ultramares case, the judge opened the door to third parties without privity to sue for

gross negligence fraud constructive fraud

A number of cases have limited the auditor's Section 18 good-faith defense when the auditor's actions have been judged to be

grossly negligent

The Foreign Corrupt Practices Act

imposes internal control requirements on public companies prohibits corporate officers from participating in bribing foreign officials

The Foreign Corrupt Practices Act

imposes record-keeping requirements on public companies

An auditor who fails to carry out contractual arrangements with a client may be liable for of

in negligence may be filed when an engagement is performed without due care generally leads to larger legal damage assessments than a breach of contract

Gross negligence

is also called constructive fraud

If an accounting firm is sanctioned or suspended by the SEC

its client may not be able to file reports on a timely basis

The SEC can suspend any person the privilege of appearing and practicing before it for

lacking in character or integrity having a CPA license suspended or revoked engaging in unethical or improper professional conduct

Defenses available to an auditor sued for fraud or gross negligence include the

level of negligence was not high enough for fraud statute of limitations has expired lack of due diligence by the plaintiff

Since the auditor will usually not have communicated directly with the plaintiff, most third parties who are not in actual privity of contract with the auditors will not likely meet the demanding standard.

near privity

The Sarbanes-Oxley Act includes criminal provisions for

obstruction of justice financial reporting fraud defrauding shareholders

The Racketeer Influenced and Corrupt Organizations Act

provides for treble damages in civil cases provides for both civil and criminal sanctions

The Private Securities Litigation Reform Act of 1995

raises the pleading requirement at the beginning of a case requires claims state the time, place, and contents of allegedly false representations

Behavior that represents an extreme departure from standards of ordinary care; failure to see the obvious or a disregard for the truth is known as

reckless conduct

The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)

refocused attention on auditor performance, duties, and legal liability may have contributed to declining lawsuits in recent years

When violations are detected, the PCAOB has the authority to

require remedial measures such as new quality control procedures revoke a firm's registration

To successfully apply the Restatement Standard or doctrine, the auditor has to be provided with sufficient description of the proposed use of the financial statements.

rusch factors

Written law enacted by the legislative branch of federal and state governments is called law

statutory

Trading of securities after they are issued are regulated by

the Securities and Exchange Act of 1934

Trading of securities after they are issued are regulated by Blank

the Securities and Exchange Act of 1934

The Dodd-Frank Act grants the PCAOB

the ability to share inspection findings with regulators in other countries

Under the Securities Act of 1933, the plaintiff must prove

the audited financial statements contained a material omission or misstatement

To hold an accountant liable for fraud, a third-party plaintiff must prove the

third party suffered damages third party relied on the false representation accountant intended to induce the third party to rely on false representation

Punitive damages may be awarded

to punish outrageous conduct when the auditor is found guilty of fraud or constructive fraud

The proper measure of damages in most Section 10(b) cases is the difference between the price paid or received for the security and

what would have been paid or received without wrongful auditor conduct