...Next, the firm can defense themselve by refering to the nonnegligent performance where auditor can claim that the audit was performance in accordance with auditing standards. Even if there were undiscovered misstatement, the auditor is not responsible if the audit was conducted properly. Contributory Negligence is a defense way where clients own actions that resulted any loss, damages and interfered with the conduct of the audit in such a way that prevented auditor from discovering the cause of the loss. Based on cases, Ultramares Corporation v. Touche (1931) , the third parties relied on the audited financial report which lead to fraudulent created by the client. The Ultramares Corporation suffered the loss because of the fraudulent mispresentation by accountants . The court stated that the accountants are not liable to third parties for honest blunders beyond the bounds of the original contract unless they were primary beneficiaries. These called as Ultramares doctorine. Back to Danial & Association cases, the ABC Bank could not blame the firm cause the fraud may occured beyond auditor...
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...Upon examination of Ultramares, certain criteria may be gleaned. Before accountants may be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports, certain prerequisites must be satisfied: (1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes, (2) in the furtherance of which a known party or parties was intended to rely, and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants’ understanding of that party or parties’ reliance. While these criteria permit some flexibility in the application of the doctrine of privity to accountants’ liability, they do not represent a departure from the principles articulated in Ultramares, but, rather, they are intended to preserve the wisdom and policy set forth therein. In the appeal we decide today, application of the foregoing principles presents little difficulty. The facts as alleged by plaintiffs fail to demonstrate the existence of a relationship between the parties sufficiently approaching privity. While the allegations in the complaint state that Smith sought to induce plaintiffs to extend credit, no claim is made that Andersen was being employed to prepare the reports with that particular purpose in mind. Moreover, there is no allegation that Andersen had any direct dealings with plaintiffs, had specifically agreed with Smith to...
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...Chapter 4--Overview of Auditor’s Legal Liability Liability to Clients-Common Law An auditor is in a contractual relationship with a client. If the auditor does not perform his or her side of the bargain according to contract terms the client can sue for breach of contract. A client may seek these remedies for breach of contract: (1) specific performance; (2) general monetary damages for losses incurred as a result of the breach; and (3) consequential damages that occur indirectly as a result of the breach. An accountant may also be sued by a client under tort law. A tort is a wrong committed which injures another person’s property, body, or reputation. A tort suit by a client is usually based on negligence or fraud. The elements of a tort action for negligence are as follows:1 A client may also sue an accountant for fraud. This tort is harder to prove than negligence because fraud requires scienter or an intent to deceive. Fraud contains these elements: A material fact is one that a reasonable person would consider important in deciding whether to act. Also, an accountant may be held liable for gross negligence by a client. Gross negligence does not require scienter but necessitates proof of reckless disregard of the truth or one’s duties. Gross negligence is referred to by some as constructive fraud. No legal question arises about a client’s right to sue (i.e., standing to sue) because the client and accountant are in privity. Privity refers to the existence of a direct...
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...41.2 Definition of Security Are the notes issued by Co-Op “securities”? In order to answer whether or not these notes are securities we need to understand what a security is. According to our textbook (p.647), the definition of security: (1) An interest or instrument that is common stock, preferred stock, a bond, a debenture, or a warrant (2) An interest or instrument that is expressly mentioned in securities acts; and (3) an investment contract. Next, we can use the family resemblance test to determine if the notes issued by Co-Op can be categorized as securities. The family resemblance test refers to a method of analyzing a debt instrument that is having a horizontal commonality. Horizontal commonality means pooling of interests, not only between the seller and each individual buyer, but also among all those who buy an investment contract in the same venture The following are the four factors to be considered while applying the family resemblance test: The motivation that prompts a reasonable buyer and seller to enter into the transaction in question: The Co-Op sold the notes in an effort to raise capital for its general business operations, and purchasers bought them in order to earn a profit in the form of interest. The plan of distribution of the instrument: the Co-Op offered the notes over an extended period to its 23,000 members, as well as to nonmembers, and more than 1,600 people held notes when the Co-Op filed for bankruptcy. The reasonable expectations...
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...1 Chapter 41.2 Definition of Security The Farmer’s Cooperative of Arkansas and Oklahoma (Co-Op) was an agricultural cooperative that had approximately 23,000 members. To raise money to support its general business operations, Co-Op sold to investors promissory notes that were payable upon demand. Co-Op offered the notes to both members and non-members, advertised the notes as an “investment program,” and offered an interest rate higher than that available on savings accounts at financial institutions. More than 1,600 people purchased the notes, worth a total of $10 million. Subsequently, Co-Op filed for bankruptcy. A class of holders of the notes filed suit against Ernst & Young, a national firm of certified public accountants that had audited Co-Op’s financial statements, alleging that Ernst & Young had violated Section 10(b) of the Securities Exchange Act of 1934. Are the notes issued by Co-Op “securities”? Reeves v. Ernst & Young, 494 U.S. 56, 110 S.Ct. 945, 108 L.Ed.2d 47, Web 1990 U.S. Lexis 1051 (Supreme Court of the United States) The notes are securities. This case reminds me to the Enron case, Ernst & Young should have noticed this situation before happening. Co- Op’s is liable for these notes. A security is a negotiable financial instrument that represents financial value, Co- op in this case is the issuer of the security. 2 Chapter 41.7 Insider Trading Donald C. Hoodes was the chief executive officer of the Sullair Corporation. As an officer of the corporation...
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...Unit 11 1. Insurance is determined based on the risk of the environment and is estimated to anticipate losses that could financially damage the insurers future. Because of the unanticipated risk involved I highly recommend that the law imposes a duty to insurance agent to become “liable for failure to advise a client of every possible insurance option, and the insured would be relieved of any burden to take care of his or her own financial needs and expectations.” (Jentz,2010,Pg1003) Unfortunate losses such as in the case of John L. Jones vs. Debra Kennedy explains a situation where the “insured claimed that the agent was liable for failing to produce underinsured motorist coverage in response to the insured’s request for “full coverage” on his vehicle.” (Jones v. Kennedy,2006) 2. Intestacy laws give spouses, children, grandchildren, or other family members authority to inherit property of the deceased family member. If no heirs exist, the government takes over the property. Since this law makes it clear that children receive authority to property after parent’s death, I believe posthumously conceived children have inheritance rights. Unfortunately only “four states have held that posthumously conceived children are heirs who are entitled to benefits under the social security act.”(Jentz,2010,Pg1004) Those estates being Arizona, Massachusetts, New Jersey, and New York. And other states such as Colorado, Delaware, Texas, Virginia, and Washington have “amended their intestacy...
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...Case 51.2 Accountant’s Liability: Johnson Bank v. George Korbakes & Company, LLP Keller School of Management Case Questions: Critical Legal Thinking Which of the following three legal theories did the Court apply in making its decision in this case? a. Ultramares doctrine b. Section 552 of the Restatement (Second) of Tort c. Foreseeability standard Before we can determine the doctrine used by the court, I would like to first dismiss the ones that do not apply. a. The court could not have used the Ultramares doctrine because GKCO was not in privity relationship with the bank or any other third parties. b. The use of Section 552 of the Restatement (Second) of Tort could have been the court’s only resort to make its decision. GKCO failed to include in the main sections of the financial report figures of great importance. Instead, GKCO included these figures in the report’s footnotes. c. The court could not have used the foreseeability standard. Because the accountant did not prepare the financial reports with the intention of informing Johnson Bank. In fact, GKCO did not know Brandon was intending to use the reports –already done by GKCO- to obtain a loan from Johnson Bank. The Court applied Section 552 of the Restatement (Second) of Tort. This doctrine says that the accountant is liable only for negligence to third parties who are members of a limited class of intended users of the client’s financial statements. (Cheeseman 806) Business Ethics Should GKCO have...
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...Phar-Mor Case 4.6 Questions 1. a) By hiring a member of its external audit team a company could gain insight into the auditor’s process and better devise methods of hiding fraud. b) Hiring a former auditor would greatly compromise and possibly impair the existing external auditor’s ability to remain independent. On top of having knowledge about the auditor’s practice, preexisting relationships could cause bias in the audit outcome. c) Sarbanes-Oxley Act 2002 limits the ability of corporations to hire employees of their external audit firms. Sox requires a “cooling-off” period of one year, after the audit commencement date, before a member of the auditing team can begin work in a key position with the client. d) It is not appropriate for auditors to trust executives of a client. AU section 230, auditors should exercise “due professional care in the performance of work”, hence apply professional skepticism. The auditor should be impartial to the level of management’s honesty and pursue factual evidence to support findings and conclusions. 2. a) The client can be in a more powerful position than the auditor in the auditor-client relationship if the auditor is trying to sell the client additional services. b) SOX prohibits external auditors from providing certain services to clients including: • bookkeeping or other services relating to the accounting records or financial statements of the audit client; • financial information systems design and implementation;...
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...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...
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...itself against. The statutory laws add the additional liability of criminal proceedings against the CPAs and the CPA firms who find themselves as defendants. The underlying accusation of negligence finds it way back to whether CPA defendants sufficient due diligence and professional care. While the Public Company Accounting Oversight Board (PCAOB) governs the SEC registered CPA firms to ensure that they are compliant in how they execute auditing services, the American Institute of Certified Public Accountants (AICPA) strives to improve the delicate balance of acceptable level of both due professional care and due diligence. The following two cases will address the inherent liability as well as professional care and due diligence. The Ultramares v. Touche & Co. case of 1931 is a great example of the inherent risks of the CPA profession. Even though that Touche & Co. audit services would be used to obtain financing, they did not know who ultimately would be financing Fred Stern & Company. The New York State Appeals Court, for failing to see the deliberate misrepresentations on the company’s account receivable, upheld the gross negligent ruling that was given to Tuche & Co.. Another unique case was the ZZZZ...
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...Discuss the benefits and costs of such a policy to public accounting firms, audit clients, and third-party financial statement users, such as investors and creditors. In your view, should the courts have the authority to socialize investment losses? If not, who should determine how investment losses are distributed in our society? The word "socialize" is used to suggest a socialist society in which profits and losses are shared by and distributed to the general public by the central government through taxation, legistration, social welfare, or some other legal means. In contrast, the capitalist society is rewarded to the risk takers alone (the auditors in this case). Until the case of Ultramares Corp. v. Touche, auditors admitted no liability whatsoever to third parties. The judgment in Ultramares reaffirmed the principle that a fraudulent accountant, not a negligent one, would be liable to third parties misled by his or her statements. This case has had an impact on the work of auditors in terms of the care they exercise in preparing the auditor's report. Coercive forces compelled auditors to adopt...
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...Before You Sue The Accountants Daniel J. Hurson Even if it looks like a strong case, be careful—there are some surprising defenses. IN THE WAKE OF the corporate accounting scandals that have dominated the business news for the last few years, as well as recurring announcements of large settlements in class action suits against major accounting firms, the prospect of a malpractice case against an accounting firm would at first glance seem attractive. Juries are presumably more predisposed to view accountants with renewed skepticism, when hardly a news cycle passes without some reference to accounting fraud, investigations, and the occasional large-scale debacles like the demise of Arthur Andersen, not to mention the high-profile criminal prosecutions that have recently gone to trial. Daniel J. Hurson, formerly Assistant Chief Litigation Counsel at the SEC, practices securities enforcement and accounting malpractice law in Washington, D.C. His website is www.hursonlaw.com. 25 26 The Practical Lawyer April 2006 Accountant malpractice litigation is a minefield of arcane judicial doctrines layered over pleading and discovery traps that can bury the best plaintiffs’ counsel. Indeed, among the players in these sagas, the accountants sometimes offer the best litigation target. The companies themselves have often tanked; the errant executives dismissed, awash in legal problems, and without insurance coverage; but the accountants (Andersen notwithstanding)...
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...Nama: Khairina Nur Izzaty NIM: 12030113410008 AUDITING LANJUTAN KEWAJIBAN HUKUM AUDITOR DAN RESPON SERTA PROTEKSI PROFESI TERHADAP AKUNTAN PUBLIK A. Latar Belakang Para professional selalu diminta untuk cermat ketika menjalankan tugas melayani klien. Menurut common law, para professional audit bertanggungjawab untuk memenuhi apa yang telah dinyatakan dalam kontrak dengan klien. Apabila auditor gagal memberikan jasa atau tidak cermat dalam pelaksanaannya, mereka secara hukum bertanggungjawab kepada klien atas kelalaian dan/atau pelanggaran kontrak, dan dalam situasi tertentu, kepada pihak selain klien mereka. Seorang akuntan publik bertanggung jawab atas setiap aspek pekerjaan akuntansi publiknya, termasuk auditing, perpajakan, jasa bantuan manajemen, dan jasa akuntansi serta pembukuan. Jika seorang akuntan publik gagal menyiapkan dan mengisi SPT pajak klien dengan benar, akuntan publik itu dapat dituntut untuk membayar semua denda dan bunga yang harus dibayar oleh klien ditambah fee penyiapan SPT pajak. Meskipun profesi telah melakukan berbagai upaya untuk membahas kewajiban hukum akuntan publik, namun jumlah tuntutan dan besaran ganti rugi bagi para penuntut tetap tinggi, termasuk tuntutan yang melibatkan pihak ketiga. B. Permasalahan Tuntutan hukum terhadap akuntan publik merupakan suatu hal yang menarik di tengah kewajiban auditor untuk memenuhi segenap peraturan yang berlaku. Atas hal tersebut maka dapat dirumuskan beberapa masalah yaitu: 1. Bagaimana...
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...1. The benefits of courts "socializing" investment losses means that the government gets to share with the public all profits and losses through a variety of legal measures. On the contrary, the costs involve society as a whole becoming much more willing to take risks that shouldn't be taken, the auditors in particular. In this particular case, the auditors claimed to not be liable to the third parties. Because of this, I think the courts should socialize these losses. Since the case of Ultramares Corp. vs. Touche, auditors now bestow a greater care in preparing their reports, which is exactly what they need to present to outside third parties. 2. Under the Securities Exchange Act of 1934 the sale of securities are regulated after their initial issuance, and auditors are subject to the act by auditing the financial statements that are submitted by public companies to the SEC. The Securities Act of 1933 regulates the initial sale of securities, and it subjects auditors when he or she audits the financial statements which then must be submitted with the registration statement to the SEC in order to have the authority to sell securities to the public. These acts are different due to the possibility of the auditor getting sued due to negligence, fraud, or even misleading statements. 3. During the 1920's there was very little regulation of financial statements, due to the lack of enforcing financial disclosures and of preventing fraudulent activity. Once corporations started...
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...Chapter 4 Legal Liability Considerations for Auditors * Review Questions 4-1 Several factors that have affected the increased number of lawsuits against CPAs are: 1. The growing awareness of the responsibilities of public accountants on the part of users of financial statements. 2. An increased consciousness on the part of the SEC regarding its responsibility for protecting investors’ interests. 3. The greater complexities of auditing and accounting due to the increasing size of businesses, the globalization of business, and the intricacies of business operations. 4. Society’s increasing acceptance of lawsuits. 5. Large civil court judgments against CPA firms, which have encouraged attorneys to provide legal services on a contingent fee basis. 6. The willingness of many CPA firms to settle their legal problems out of court. 7. The difficulty courts have in understanding and interpreting technical accounting and auditing matters. 4-2 The most important positive effects are the increased quality control by CPA firms that is likely to result from actual and potential lawsuits and the ability of injured parties to receive remuneration for their damages. Negative effects are the energy required to defend groundless cases and the harmful impact on the public’s image of the profession. Legal liability may also increase the cost of audits to society, by causing CPA firms to increase the evidence accumulated. 4-3 Business failure...
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