Chapter 6

FCPA makes it a crime to offer or provide payments for purpose of

obtaining or retaining business

examples of acceptable payments (1)

obtaining permits, licenses, and official documents to qualify a person to do business in a foreign country

auditor failed to exercise due care or standard of care that other accountants would have done in similar situations

ordinary negligence

under near privity relationship approach, auditors are legally liable to third parties for

ordinary negligence

under restatement (2nd) of law of torts, auditors are legally liable to 3rd parties for

ordinary negligence beyond near privity

under foreseeable third party approach, auditors are legally liable to third parties for

ordinary negligence with reliance on the statements

auditor's defense against 3rd party lawsuits for negligence that claim the auditor did not detect a misstatement or fraud requires proof that (1)

auditor did not have duty to third party

one of auditor's biggest defense

auditor's work was performed in accordance with accepted auditing standards (not negligent)

auditor's defense against 3rd party lawsuits for negligence that claim the auditor did not detect a misstatement or fraud requires proof that (3)

auditor's work was performed in accordance with professional standards

when privity exists, plaintiffs must demonstrate all of the following (2)

auditors did not perform in accordance with terms of contract, thereby breaching that contract

when privity exists, plaintiffs must demonstrate all of the following (3)

auditors failed to exercise appropriate level of professional care related to tort actions

"knowing" standard makes criminal liability for illegal payments to third parties applies to individuals who

knowingly engage in or tolerate illegal payments under the act

under common law for fraud, the plaintiff (3rd party) must prove (2)

knowledge or belief by accountant that representation was false

Credit Alliance v Arthur Anderson & Co expanded privity standard to include ___ between third party and accountant

near privity relationship

importance of Ultramares decision is that third parties without privity could sue if

negligence was so great as to constitute gross negligence

restatement modifies traditional rule of privity by allowing nonclients to sue accountants for

negligent misrepresentations

liability for fraud is not limited to cases where the auditor was

knowingly deceitful

"reason to know" standard is replaced by

"knowing" standard

under FCPA, a corporation that violates the law can be fined up to

$1 million

law with greatest effect in US

Foreign Corrupt Practices Act

___ is responsible for civil enforcement of antibribery provisions with respect to registrants

SEC

imposes duties on auditors to disclose and explain in their reports material control weaknesses and their effect on overall audit process

PCAOB auditing standard no 5

auditors may have legal liability under

Securities Act of 1933 Securities Act of 1934

FCPA applies to

US corporations (public or private) foreign companies filing with SEC

under common law for fraud, the plaintiff (3rd party) must prove (3)

accountant intended to induce third party to rely on false representation

approach followed by vast majority of states

actually foreseen third parties

an auditor would cite ___ as evidence of having exercised due care in conducting the audit

adherence to generally accepted auditing standards

definition of grease payments is expanded to include payments to

any foreign official that facilitates or expedites securing the performance of a routine governmental action

auditor's defense against 3rd party lawsuits for negligence that claim the auditor did not detect a misstatement or fraud requires proof that (5)

any loss to the third party was caused by other events

auditors can defend a common law action by presenting

arguments and evidence to rebut third party plaintiff claims and evidence

cause of action like breach of contract, tort, deceit, fraud and anything else that may be relevant to claim are cases that are referred to as

audit failures

the third parties who are able to sue under restatement must ___ and provided that the accountant ___

belong to a limited group had actual knowledge that his or her professional opinion would be supplied to that group

claim that accounting and auditing services were not performed in a way consistent with terms of a contract

breach of contract

plaintiffs in legal actions involving auditors, such as clients or third party users of financial statements, generally assert all possible causes of action including

breach of contract tort deceit fraud

when privity exists, plaintiffs must demonstrate all of the following (4)

breach of contract or failure to exercise appropriate level of care caused loss

auditor's defense against 3rd party lawsuits for negligence that claim the auditor did not detect a misstatement or fraud requires proof that (6)

claim is invalid because the statute of limitations has expired

___ or ___ can bring tort actions against auditors

clients users of financial statements

___ for fraud is available to third parties in any jurisdiction

common law liability

the section 302 certification states that based on officer's knowledge, the report does not

contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements not misleading

statutory liabilities may lead to

convictions for crimes provided their conduct was willful

___ is responsible for all criminal enforcement and for civil enforcement of the antibribery provisions with respect to domestic entities and foreign companies and nationals

department of justice

under PCAOB auditing standard no 5, auditors must plan their audit to

detect all material weaknesses in client's control structure and operational effectiveness

act also prohibits corporations from indemnifying fines imposed on

directors officers employees agents

SOX was passed to increase transparency of financial reporting by ___ and to ___

enhancing corporate disclosure and governance practices foster ethical climate

client can bring a lawsuit against an accountant for

failing to live up to terms of contract breach of contract other tort actions

under common law for fraud, the plaintiff (3rd party) must prove (1)

false representation by accountant

under FCPA, officers of corporation that violates law who directly participated in violations of the act or had "reason to know" of such violations can be

fined up to $10,000 imprisoned for up to 5 years or both

establishes standards for acceptability of payments made by US multinational entities or their agent to foreign government officials

foreign corrupt practices act

can sue successfully an auditor for negligence beyond near privity to a person or limited group whose reliance is

foreseen

broadened auditor's liability to third parties to include those that were

foreseen and reasonably foreseeable

courts have held that ___ may be established by proof that the accountant acted with knowledge of false representation

fraudulent intent or scienter

permissible facilitating payments

grease payments

represents extreme or reckless departure from professional standards of care

gross negligence or constructive fraud

due care includes exercising degree of professional skepticism expected

in audit of financial statements

a payment is defined as illegal if it is intended to

influence a foreign official to act in a way that is incompatible with official's legal duty

foreseen third party concept means accountant know that

party(ies) would rely on financial statements for specific transaction

2 affirmative defenses for those accused of violating FCPA (2)

payment can be made for reasonable and bona fide expenditures

2 affirmative defenses for those accused of violating FCPA (1)

payment is lawful under written laws of foreign country

FCPA makes it a crime to offer or provide

payments to officials of foreign governments, political candidates or political parties

examples of acceptable payments (5)

performing actions of a similar nature

under legal approach of ultramares, auditors are legally liable to third parties for

possibly gross negligence that constitutes (constructive) fraud

FCPA does not prohibit grease payments to foreign government employees whose duties are

primarily ministerial or clerical

an accountant has a contractual obligation to the client that creates a

privity relationship

examples of acceptable payments (2)

processing governmental papers such as visas or work orders

common law liability requires the auditor to perform

professional services with due care

examples of acceptable payments (3)

providing police protection, mail pickup, and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country

examples of acceptable payments (4)

providing telephone service, power, and water, unloading and loading cargo, or protecting perishable product or commodities from deterioration

expands accountants' legal liability exposure for negligence beyond those with near privity (actually foreseen) to a small group of persons and classes who are or should be foreseen by auditor as relying on financial statements

restatement (2nd) of law of torts

SOX also increases auditor liability to third parties because it requires accounting firms to

review and assess management's report on internal controls and issue its own report

failing to disclose detected material weaknesses exposes auditors to

section 11 liability

corporate responsibility for financial reports

section 302

requires the certification of periodic reports filed with SEC by CEO and CFO of public companies

section 302

internal control over financial reporting

section 404

in addition to breach of contract, auditors may be liable to clients for tort liability that ranges from ___ to ___

simple ordinary negligence fraud

lawsuits for damages under common law usually result when

someone suffers financial loss after relying on financial statements later found to be materially misstated

FCPA does not prohibit grease payments to foreign government employees whose duties are primarily ministerial or clerical because such payments are

sometimes required to persuade recipients to perform their normal duties

when privity exists, plaintiffs must demonstrate all of the following (1)

suffered an economic loss

evidence of having exercised due care exists if the auditor can demonstrate having performed services with

the same degree of skill and judgment possessed by others in the profession

although auditors may have contractual relationships with third parties, cases involving breach of contract are brought most frequently against auditors by

their clients

SOX increases auditor liability to

third parties

SOX specifies or expands the scope of

third parties to whom an auditor owes duty of care

auditor's defense against 3rd party lawsuits for negligence that claim the auditor did not detect a misstatement or fraud requires proof that (4)

third party did not suffer a loss

once a plaintiff has demonstrated an economic loss and materially misstated financial statements, defenses available to auditors against 3rd parties include

third party lacked standing to sue in a particular jurisdiction appropriate relationship between auditor and third party did not exist

if poor business practices or stock market declines caused loss of third party, auditor can use defense that

third party loss was due to events other than financial statements and auditor examination

under common law for fraud, the plaintiff (3rd party) must prove (4)

third party relied on false representation

under common law for fraud, the plaintiff (3rd party) must prove (5)

third party suffered damages

auditor's defense against 3rd party lawsuits for negligence that claim the auditor did not detect a misstatement or fraud requires proof that (2)

third party was negligent

cover other civil complaints arising from auditors' failure to exercise appropriate level of professional care sometimes referred to as substantiated performance

tort actions (for wrongdoings)

the term ___ and its application in criminal securities law cases often is influenced by context of the situation

willful

section 32(a) of securities exchange act of 1934 provides that a person who ___ can be charged with a crime

willfully violates any provision of the act

section 15(b)(4) authorizes the SEC to seek civil administrative penalties against any person who

willfully violates certain provisions of securities laws