Knapp Case 7.5
Due Fred Stern-Ultramares
1. The benefits of courts “socialize” investment losses means that the government gets to share with the public all profits and losses through a variety of legal measures. In the case, the auditor has been pushed too much into liability. The auditors claimed not to be liable to the third parties in the case. I think the courts should socialize these losses and because of the case many auditors began to carefully prepare their reports. The reports that the auditors create can be presented to outside third parties.
2. The Securities Act of 1933 regulates the initial sale of securities, and it subjects auditors when they audit the financial statements which must be summited with the SEC in order to have the authority to sell securities to the public. Securities Exchange Act of 1944 is the law that created the Securities and Exchange Commission (SEC) and gives it broad authority over the securities industry. They are different because auditors can be sued to negligence, fraud, or ever incorrect statements.
3. In 1920s, there were little regulations on financial statements due to the disclosures that prevented fraudulent activities. When corporations started to grow and the public began to own stocks and investments began to increase the acts were enforced.
4. The balance sheet was considered the most important and reliable financial source to third parties because GAAP was not yet developed in the 1920s.
5. No, because engagement letters would make financial statements look in the best manor for companies that are being audited. The letter would reduce auditors liability.