Unit 9 & 10 Finance 240

Under what circumstances can an attorney be held liable for to a non-client?

When the attorney has committed fraud or malicious conduct.

Courts historically have granted deference to an administrative agency's _________ .

judgment

The EPA conducts meetings to discuss the possibility of creating additional regulations within the next five years. Under the Government in the Sunshine Act, the meetings

may be closed to the public

The Freedom of Information Act exempts records pertaining to

national security

(True/False) When a negotiated settlement cannot be reached, the agency may issue a formal complaint against the suspected violator.

True

(True/False) When regulated groups oppose a rule adopted by an agency, they can bring a lawsuit arguing that the rule was not authorized by the enabling statute.

True

The Four Elements of Fraud:

1. A misrepresentation of a material fact. 2. an intent to deceive. 3. Justifiable reliance by the innocent party on the misrepresentation. 4. To obtain damages, an actual injury to the innocent party.

The Arbitrary and Capricious Standard Includes Factors, Such as Whether the Agency Has Done Any of the Following:

1. Failed to provide a rational explanation for its decision. 2. Changed its prior policy without justification. 3. Considered legally inappropriate factors. 4. Entirely failed to consider a relevant fact. 5. Rendered a decision plainly contrary to the evidence.

The New Chevron Standard for Courts When Reviewing Agency Interpretations of Law, which Involves the Following Two Questions:

1. Did Congress directly address the issue in dispute in the statute? If so, the statutory language prevails. 2. If the statute is silent or embiguous, is the agency's interpretation "reasonable"? If it is, a court should uphold the agency's interpretation even if the court would have interpreted the law differently.

two basic types of administrative agencies:

1. Executive agencies 2. independent regulatory agencies

Key Provisions of the Sarbanes-Oxley Act Relating to Public Accounting Firms:

1. Makes it unlawful for Registered Public Accounting Firms (RPAFs) to perform both audit and non-audit services for the same company at the same time. 2. Requires preapprocal for the most auditing series from the issuer's (the corporation's) audit committee. 3. Reuqires audit partner rotation by prohibiting RPAFs from providing audit service to an issuer if either the lead audit partner or the audit partner responsible for reviewing the audit has provided such services to the coportation in each of the prior five years. 4. Requires RPAFs to make timely reports to the audit committees of the corporations.

Under the Restatement (Third) of Torts an Accountant's Liability Extends to:

1. Persons for whose benefit and guidance the accountant intends to supply the information or known that the recipient intends to supply it. 2. Persons whom the accountant intends the information to influence to knows that the recipient so intends.

Agencies Can Conduct Warrantless Searches in the Following Situations:

1. Searches in certain highly regulated industries, such as firearms or liquor. 2. When a statute permits warrantless searches of certain types of hazardous operations such as coal mines. 3. When there is an emergency situation.

A Professional May Be Held Liable for Actual Fraud When:

1. She or he intentionally misstates a material fact to mislead a client. 2. The client is injured as a result of justifiably relying on the misstated fact.

Document Retention and Destruction:

1. The Sarbanes-Oxlet Act provides that anyone who destroys, alters, or falsifies records with the intent to obstruct or influence a federal investigation or in relation to bankruptcy proceedings can be criminally prosecuted and sentenced to a fine, imprisonment for up to twenty years , or both. 2. The act also requires accountants who audit or review publicly traded companies to retain all working papers related to the audit or review for a period a five years (now amended for seven years). Violators can be sentences to a fine, imprisonment for up to ten years, or both.

Possible Defenses That an Accountant Can Use to Counter a Claim of Negligence:

1. The accountant was not negligent 2. If the accountant was negligent, this was not the proximate cause of the clients losses. 3. The client was also negligent (depending on whether the state applies contributory negligence or comparative negligence).

To Determine Whether an Agency Is Abusing Its Discretion in Pursuing Information, a Court May Consider Such Factors as the Following:

1. The purpose of the investigation. 2. The relevance of the information being sought. 3. The specificity of the demand for testimony or documents. 4. The burden of the demand on the party from whom the information is sought.

three potential areas of liability that professionals may be concerned with under the common law:

1. breach of contract 2. negligence 3. fraud

process of formal administrative adjudication:

1. complaint 2. answer 3. hearing before administrative law judge 4. order of administrative law judge 5. appeal to governing board of agency 6. final agency order 7. appropriate court for review of agency decision 8. court order

three basic steps involved in notice-and-comment rule making:

1. notice of the proposed rule making 2. comment period 3. the final rule

three agencies' powers:

1. rule making 2. enforcement 3. adjudication

two basic types of subpoenas:

1. subpoena ad testificandum 2. subpoena duces tecum

Delegation Doctrine

A doctrine based on Article I, Section 8, of the U.S. Constitution, which has been construed to allow Congress to delegate some its power to make and implement laws to administrative agencies.

Bureaucracy

A large organization that is structured hierarchically to carry out specific functions.

What happens when substantial changes occur to a proposed rule because of public comments?

A new proposal and a new opportunity for comments are required.

International Financial Reporting Standards (GAAP)

A set of accounting standards created by the International Accounting Standards Board (IASB). Today, more than 120 nations and reporting jurisdiction either permit or require IFRS for domestically listed companies.

Interpretive rules

Administrativ agency rules that simply declare policies or explain the agency's positions and do not establish any legal rights or obligations.

legislative rules

Administrative agency rules that affect substantive legal rights and carry the same weight as congressionally enacted statutes.

Auditor

An accountant qualified to perform audits (systematic inspections) of a business's financial records.

Notice-and-comment rule making

An administrative rule making procedure that involves the publication of a notice of a proposed rule making in the Federal Register, a comment period for interested parties to express their views on the proposed rule, and the publication of the agency's final rule in the federal register.

The Bureau of Alcohol, Tobacco, and Firearms suspects that Pawn Shoppe, Inc. is violating firearms regulations. To obtain evidence, the bureau: A.) must obtain a search warrant. B.) can search the premises and seize evidence without a search warrant. C.) must have evidence of criminal activity and must obtain a search warrant before searching the premises.

B.) can search the premises and seize evidence without a search warrant.

Why is the Ultramares Rule sometimes referred to as the New York Rule?

Because liability was imposed by the New York Court of Appeals (the state's highest court).

One important difference between formal litigation in a court and an administrative hearing before an administrative law judge (ALJ) is that: A.) the ALJ is typically not an agency employee. B.) an administrative agency proceeding is typically far more formal. C.) an administrative hearing can admit hearsay as evidence. D.) less information is admitted during an administrative hearing.

C.) an administrative hearing can admit hearsay as evidence.

The Ultramares doctrine, which sets forth the traditional rule of liability of accountants to third parties, requires: A.) a declaration of intent to use the accountant's documents. B.) Scienter. C.) privity or near privity of contract between the accountant and the third party. D.) that the third party's use of the accountant's documents was foreseeable.

C.) privity or near privity of contract between the accountant and the third party.

The EPA and Zenith Dry Cleaners are negotiating a settlement for alleged violations of federal emissions standards. The EPA issues subpoenas duces tecum for all of Zenith's financial records for the past two years and orders Zenith to pay the costs. Zenith challenges the subpoena on the basis that: A.) an alleged violator does not have to bear the costs of complying with the subpoena. B.) the subpoena was not sufficiently specific. C.) the agency's request is unrelated to the emission violation and instead is aimed at pressuring Zenith into a settlement.

C.) the agency's request is unrelated to the emission violation and instead is aimed at pressuring Zenith into a settlement.

Does an agency involved in rulemaking need to respond to all comments during the comment period?

No, the agency only must respond to any significant comments that bear directly on the proposed rule.

(True/False) A material fact is one that a reasonable person would consider unimportant in deciding whether to act.

False

(True/False) After the Chevron case, all of those involved in rulemaking by administrative agencies accepted that decision without discussion.

False

(True/False) All cabinet departments of the executive branch are included in independent regulatory agencies.

False

(True/False) Before any on-site investigation by a federal administrative agency, most businesses resist those inspections by going to an appeals court.

False

(True/False) Every administrative hearing procedure must be exactly the same as legislated by Congress.

False

(True/False) The Sarbanes-Oxley Act only applies to domestic public accounting firms.

False

(True/False) The administrative law judge and the agency's investigative and prosecutorial staff are basically one integrated unit.

False

(True/False) The major function of today's federal agencies is adjudication.

False

Administrative law judge

One who presides over an administrative agency hearing and who has the power to administer oaths, take testimony, rule on questions of evidence, and make determinations of facts.

Initial order

In the contract of administrative law, an agency's disposition in a matter other than rule making. And administrative law judge's initial order becomes final unless it is appealed.

The Public Company Accounting Oversight Board was created by the

Sarbanes-Oxley Act of 2002

Generally Accepted Auditing Standards (GAAS)

Standards concerning an auditors professional qualities and the judgement exercised by him or her in the performance of an examination and report. The source of the standards is the American Institute of Certified Public Accountants.

Generally Accepted Accounting Principles (GAAP)

The conventions, rules, and procedure that define accepted accounting practices at a particular time. The source of the principles is the Financial Accounting Standards Board.

Final order

The final decision of an administrative agency on an issue. If no appeal is taken, of if the case is not review or considered anew by the agency commission , the administrative law judge's initial order becomes the final order of the agency.

Defalcation

The misuse of funds.

Adjudication

The process of resolving a dispute by presenting evidence and arguments before a neutral decision maker.

Rulemaking

The process undertaken by an administrative agency when formally or amending an old one. Rule making involves notifying the public of a proposed rule or change and receiving and considering the public's comments.

Why have the majority of courts rejected holding accountants liable to any users whose reliance on accountant's statements or reports was reasonable foreseeable?

The standard extends liability too far and exposes accountants to massive liability.

(True/False) If an agency failed to follow proper rulemaking procedures when it issued the final rule, the rule may not be binding.

True

(True/False) One of the more important tasks that an accountant may perform for a business is an audit.

True

(True/False) The Federal Register is a daily publication of the executive branch that prints (and offers online) government orders, rules, comments, and regulations.

True

(True/False) The majority of courts hold that auditors can be held liable to third parties for negligence.

True

An independent regulatory agency is usually run by...

a commission or board

AT&T wants to obtain additional rights to operate within the 700 MHz spectrum in the U.S. The Federal Communications Commission (FCC) has rules and regulations that govern wireless spectrum auction. The FCC is a. an administrative agency. b. a legislative agency. c. a judicial agency. d. an executive agency.

a. an administrative agency.

Federal administrative agencies are created: a. by enabling legislation passed by Congress. b. by legislative orders issued by the president. c. without any formal action.

a. by enabling legislation passed by Congress.

UsAgainstThem, a nonprofit environmental group, is contesting the EPA's interpretation of a rule that has allowed a refinery to offset an increase in emissions relating to one part of the refinery by reducing emissions in another part of the refinery. In challenging the EPA's interpretation, a court will likely a. defer to the agency's interpretation. b. refer the matter to an agency sub-committee. c. seek advice from Congress. d. dismiss the suit for lack of standing.

a. defer to the agency's interpretation.

The main difference between independent regulatory agencies and executive agencies is that: a. executive agencies are subject to the authority of the president to a greater degree than are independent regulatory agencies. b. independent regulatory agencies are subject only to the authority of Congress. c. executive agencies report only to Congress.

a. executive agencies are subject to the authority of the president to a greater degree than are independent regulatory agencies.

The EPA passes a proposed a rule change to the Clean Air Act related to the discharge of emissions by factories. The EPA's action would be considered arbitrary and capricious for all of the following reasons except: a. it failed to provided the required time for notice and comment. b. it failed to provide a rational explanation for its decision. c. it changed a prior policy without justification. d. it considered legally inappropriate factors.

a. it failed to provided the required time for notice and comment.

When an agency formally creates a new rule, its first step is to: a. publish a notice of the proposed rulemaking proceeding in the Federal Register. b. solicit public comment. c. issue a subpoena.

a. publish a notice of the proposed rulemaking proceeding in the Federal Register.

The professional conduct of attorneys is governed by: a. state rules governing the professional conduct of attorneys. b. the individual attorney's church. c. the Insurance industry. d. GAAP.

a. state rules governing the professional conduct of attorneys.

Congress can _______ an agency all together if it wishes.

abolish

Charges that an individual or a firm has violated an administrative rule are first brought before

an administrative law judge

The president has the power to ________ federal officers and also the power to veto enabling legislation.

appoint

The law that specifies the procedural requirements that all federal agencies must follow in their rulemaking, adjudication, and other functions is the: a. Administrative Open Government Act. b. Administrative Procedure Act. c. Occupational Safety and Health Act.

b. Administrative Procedure Act.

Who are the members of juries in administrative hearings? a. The secretaries in the agency. b. No one, because there are no juries. c. Other members of the agency.

b. No one, because there are no juries.

What happens when no party appeals an adjudication? a. An initial order is given. b. The ALJ's decision becomes the final order of the agency. c. The ALJ dismisses the complaint. d. A federal district court reviews the initial order.

b. The ALJ's decision becomes the final order of the agency.

BP violated the Clean Air Act by discharging pollutants from one of its refineries and was unable to reach a settlement with the EPA regarding a violation of the law. The EPA plans to go forward with a trial on this matter which will be hear by a. the Supreme Court. b. an administrative law judge. c. an appellate court judge. d. a county court judge.

b. an administrative law judge.

Under the common law, accountants, attorneys, and other professionals face liability for breach of contract only when the professional: a. fails to perform a duty of care. b. fails to perform as agreed in a contract. c. wrongfully interferes with the right to use and enjoy property.

b. fails to perform as agreed in a contract.

The SEC decided to replace the rules-based GAAP with the principles-based International Financial Reporting Standards (IFRS) for several reasons EXCEPT: a. the IFRS are simpler, more strict, and short, filling only 2,500 pages. b. the switch to IFRS benefits foreign accountants. c. having uniform accounting rules applicable to all nations makes sense in a global economy. d. GAAP rules are very detailed and fill nearly 25,000 pages. e. IFRS focus more on general principles than on specific rules. Companies should find IFRS less difficult to comply with.

b. the switch to IFRS benefits foreign accountants.

Courts generally hold that Article I of the U.S. Constitution is the _____ for all administrative law.

basis

All administrative agencies taken together are considered the _______ of the federal government.

bureaucracy

Check My Work When will an accountant be guilty of constructive fraud? a. Only when she or he works for construction companies. b. For all negligent acts. c. When she or he is grossly negligent in performing his or her duties.

c. When she or he is grossly negligent in performing his or her duties.

William wants to obtain information from the Securities and Exchange Commission regarding the number of active cases related to insider trading. To request this information, he would need to fill which of the following with the SEC: a. a Regulatory Flexibility Act request. b. an SEC disclosure request. c. a Freedom of Information Act request. d. a Sunshine Act request.

c. a Freedom of Information Act request.

The EPA wants to ensure that Delmar Oil Company is in compliance with federal environmental rules regarding cleanup of oil and gasoline spills. In order to do so, it: a. must issue a subpoena. b. must rely on Shay's documentation of compliance. c. can conduct an on-site inspection. d. must obtain a search warrant.

c. can conduct an on-site inspection.

Congress passed the Securities Exchange Act of 1934, which created the Securities Exchange Commission. This legislation, which created an independent regulator agency, is known as a. a Congressional act. b. administrative law. c. enabling legislation. d. common law.

c. enabling legislation.

The judicial branch exercises ________ over agency powers through the courts' review of agency actions.

control

Celeste's accountant fails to prepare her tax returns accurately so she is charged with penalties and interest by the IRS. To prevail in a lawsuit for negligence against her accountant, she must prove all of the following EXCEPT that: a. a duty of care existed. b. her injury was proximately caused by the accountant's breach of duty of care. c. she suffered financial harm. d. the accountant was a member of a professional organization.

d. the accountant was a member of a professional organization.

The FDA is investigating Shari's Cosmetics for possible violation of purity regulations. The FDA wants Yasmin, their lead chemist for the company, to testify at an administrative hearing. Yasmin refuses, so the FDA

issues a subpoena ad testificandum

Another term for defalcation is

embezzlement

Private communications between the ALJ and any party to the agency proceedings are known as _______ communications.

ex parte

Such deference seems appropriate when applied to an agency's analysis of _________ questions.

factual

Executive agencies are often referred to as the

fourth branch of government

Congress can limit the power of federal agencies through its ________ authority.

funding

In performing their services, accountants must comply with

generally accepted accounting principles.

Following a hearing, an administrative law judge (ALJ) first issues a

initial order

In the Chevron case, the United States Supreme Court created a standard of broadened deference to agencies on questions of legal ___________ .

interpretation

Which of the following is NOT a third party that relies on opinions of auditors (accountants) when making decisions?

part-time employees

The delegation doctrine holds that Article I grants Congress the authority to delegate some of its _______ by establishing administrative agencies.

powers

Malpractice can best be defined as

professional negligence

Congress has the power to "freeze" the enforcement of most federal _________ before they take effect.

regulations

The Court's decision in the Chevron case created a new standard for courts to use when ________ agency interpretations of law.

reviewing

Working papers usually do NOT include:

school calendars

Another way to describe the legislative rules that agencies create is that they are _____ rules.

substantive.

The Restatement (Third) of Torts states that accountants will be liable to third parties for the negligent acts of accountants:

when the third party is a foreseen , or known user.