Reg Accountants' Legal Responsibilities - Memorize

Front 1

In a suit for damages under Section 11 of the Securities Act of 1933 damages are calculated as

Back 1

the difference between the price paid for the securities and their value on the date suit was filed.

Front 2

A registration statement is used in connection with the issuance of securities. Misstatements contained in a registration are governed by

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the provisions of the 1933 Securities Act.

Front 3

Under the provisions of Section 10(b) of the Securities Exchange Act of 1934, an accountant may be held liable for

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actions which are tantamount to common law fraud, or a slightly lesser standard, gross negligence which amounts to reckless disregard for the truth. There must be evidence of a material misstatement or omission knowingly (or recklessly) made, which the injured party relied upon to his or her detriment. The reliance is an element which must be proven.
The U. S. Supreme Court, in Central Bank of Denver v. First Interstate Bank of Denver (1994), ruled that entities may not be held liable under the provisions of the Securities Exchange Act of 1934 for merely “aiding and abetting.” (assisting).

Front 4

Under the provisions of Section 10(b) of the Securities Exchange Act of 1934, a CPA may be held liable for actions which are tantamount (equivalent ) to common law fraud, or a slightly lesser standard, gross negligence which amounts to reckless disregard for the truth. That the misstatement (or omission) was

Back 4

material is one of the elements which must be proven.
There must be evidence of a material misstatement or omission knowingly (or recklessly) made, which the injured party relied upon to his or her detriment.

Front 5

To recover in an action for common law fraud, one must prove five elements:

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a misstatement or omission of a material fact; knowingly made with an intent to deceive (scienter); relied upon by the complaining party; which results in damages.
Privity of contract may exist, but is not a necessary element. And, proof of mere negligence is not sufficient to establish scienter.

Front 6

An accountant must possess the skills that

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an ordinarily prudent accountant would have, and exercise the degree of care that an ordinarily prudent accountant would exercise. This standard of care, however, is dependent on the particular circumstances existing at the time the work is performed. An accountant is expected to exercise ordinary care and diligence, measured by the particular circumstances.

Front 7

Constructive fraud by a CPA means that the CPA was

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more than merely negligent, but did not act with malice of with a specific intent to deceive, but was reckless or grossly negligent.

Front 8

A CPA’s failure to carry out the duty expressed in the engagement will result in

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liability for breach of contract regardless of negligence. (A CPA’s failure to carry out the duty expressed in the engagement may or may not have been a product of negligence.)

Front 9

CPAs are liable to third parties when

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they are aware that their work will be relied upon, such as for an extension of credit.

Front 10

Orth, a CPA, conducted an audit of Palladium Resources, Inc., and rendered an opinion as to the company’s financial condition. In a suit by Palladium Resources, Inc., against Orth for breach of contract and negligence, which of the following would be an INCORRECT statement as to the standard of care required of Orth?


A A violation of GAAP or GAAS will be evidence of the accountant’s negligence unless the accountant qualifies his/her opinion.
B An accountant must exercise the skills that an ordinarily prudent accountant would have exercised under the particular circumstances of the audit engagement.
C Orth will only be liable for breach of contract if he was grossly negligent.
D Orth is NOT required to detect all fraudulent schemes in existence at Palladium Resources, Inc.

Back 10

The correct answer was C.

An accountant will be liable for breach of contract if negligent in performing the contracted work. It is not necessary for a client to prove gross negligence or fraud. All of the other statements are generally correct with regard to an accountant’s liability to a client and the standard of acre generally imposed by common law.

Front 11

With respect to negligence, an accountant is liable to

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his client and in most jurisdictions, to the intended users of his work product where the users are members of a limited class, such as the case here (“several investment bankers who were considering purchasing a controlling interest in Tracy Corporation”). In addition, if Javier’s wrongdoing was fraudulent or involved gross negligence (constructive fraud) his liability would extend to any third party injured thereby.

Front 12

For a third party to recover against a CPA, the third party must prove

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fraud or gross negligence on the part of the CPA, or,
if the CPA is merely negligent,
the third party may recover if it can be shown that the
CPA knew the third party would be relying on the CPA's work product, and
actually did rely.

Front 13

A limited number of states have enacted laws granting varying degrees of

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accountant-client privilege, but the privilege is not as broad as the attorney-client privilege. Where such a privilege exists, only the client can wave the privilege.

Front 14

The Internal Revenue Service Restructuring and Reform Act of 1998 gives taxpayers a privilege regarding written or verbal tax advice from a CPA. Which statement would represent an INCORRECT interpretation of the Restructuring and Reform Act of 1998?


A The creation of the new privilege was not intended to modify, but rather to extend the attorney-client common law confidentiality privilege to other practitioners, such as CPAs.
B Information disclosed to a CPA for the purpose of preparing a return is privileged under the Reform Act.
C The preparation of tax accrual work papers is not considered tax advice when developed to evaluate a client’s contingent tax liabilities in connection with financial condition disclosures.
D The privilege does not extend to written tax advice to corporate clients concerning their corporations’ involvement in tax shelters.

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The correct answer was B.

Section 7525 provides: “With respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney” but only with respect to “non criminal tax matter before the Internal Revenue Service and non criminal tax proceedings in Federal court brought by or against the United States.” In addition, the privilege does not extend to written tax advice to corporate clients concerning their corporations’ involvement in tax shelters.

Front 15

A legal action may be successfully maintained against an accountant by a person not in privity of contract with the accountant only under certain circumstances.

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If the legal action is based upon fraud, or on gross negligence which amounts to a reckless disregard for the truth, lack of privity is no defense. Mere negligence by an accountant is actionable by an entity not in privity with the accountant only if the accounting work was intended for the plaintiff (or for a group which included the plaintiff).

Front 16

The Sarbanes-Oxley Act requires that

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financial reports reflect all material correcting adjustments;
that off–balance sheet transactions be disclosed;
and, that companies disclose to the public on a rapid and current basis additional information concerning material changes in financial condition or operations, in plain English.
The Act further requires that each annual report include a discussion stating management’s responsibility for establishing effective internal controls and procedures for financial reporting, and provide an assessment of the effectiveness of such controls and procedures.

Front 17

Pursuant to the 1933 Securities Act, a CPA will be liable for misstatements or omissions in financial statements which are part of a registration statement if the misinformation is material and results in damages. A purchaser need not prove

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fraud, negligence or reliance in order to prevail.

Front 18

Under Section 11 of the Securities Act of 1933, a CPA may be liable, in connection with his work product, to purchasers of securities if the work product contains material misstatements or omissions, and damages were suffered. Plaintiffs need 1)_____on the part of the CPA, but a CPA can avoid liability by 2)_____

Back 18

1)not prove negligence
2)proving the exercise of due diligence.

Front 19

The Securities Act of 1933 requires that, in a public offering exceeding $5,000,000 either

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a registration statement must be filed or
resale of the securities within two years is restricted.

Front 20

Rule 505 of regulation D permits a company to sell up to $5 million in securities over a 12 month period but prohibits______

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general advertising, limits a sales to not more than 35 nonaccredited investors and restricts resale for two years.
SO share certificates must be marked with a legend indicating that resale is restricted.

Front 21

The Securities Act of 1933 imposes on companies who seek to raise capital in the marketplace a requirement that they first file a registration statement by which prospective investors are provided information about the company necessary ______

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to make an informed investment decision - generally assuring

Front 22

Violations of the Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 can result in ___

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civil penalties,forfeiture of profits, including prejudgment interest, as well as
a permanent injunction prohibiting future violations.

Front 23

Rule 506 of regulation D permits a company to sell an unlimited amount of securities to accredited purchasers but limits immediate resale by imposing

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a two year waiting period and if a registration statement is first put into effect.

Front 24

For a purchaser of original issue securities to hold liable experts who participated in the preparation of the registration statement, the purchaser must prove the existence of a _____ and _______

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material misstatement (or omission) in the financial statements, and
damages.
These are the only elements of 1933 Act fraud, unlike common law fraud which requires, in addition, scienter (intent to deceive) and reliance.

Front 25

Material misstatements or omissions in connection with a sale of securities is___

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a violation of the anti fraud provisions of the 1933 Securities Act.
Proof reliance or intent are not necessary.
There is a critical distinction between disclosing the risk a future event might occur and disclosing actual knowledge the event will occur. Phish's cautionary language only disclosed a risk that the Motor Vehicle Department might leave Marx Place, not his knowledge that it actually planned to do so in the near future.

Front 26

Restricted securities are securities acquired in unregistered, private sales from the issuer or from an affiliate of the issuer. Investors typically receive restricted securities through private placement offerings, Regulation D offerings and employee stock benefit plans. Sale of restricted securities can be made by complying with the mandates of Rule 144. In general, this means

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holding the stock for two year before selling, or, holding the stock for one year, then selling in small brokered transactions. If the securities are not held for two years, there must be adequate current information available about the issuer. This generally means the issuer has complied with the periodic reporting requirements of the Securities Exchange Act of 1934.

Front 27

Section 10(b) of the 1934 Act, SEC Rule 10b-5, prohibits fraud related to securities trading, including

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trading on inside information. Mal traded on insider information and as a result is subject to both criminal and civil penalties. The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 provide for penalties for illegal insider trading to be as high as three times the profit gained or the loss avoided from the illegal trading. Mal was not in violation of Section 16(b) of the Securities Exchange Act of 1934, which prohibits short-swing profits (from any purchases and sales within any six month period) made by corporate directors, officers, or stockholders owning more than 10% of a firm's shares.

Front 28

The 1934 Act regulates proxy solicitation, which is information that must be given to a corporation's shareholders prior to soliciting votes. Prior to every shareholder meeting, a registered company must provide each shareholder with a proxy statement containing certain material, along with a proxy

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form on which the shareholder may vote on each proposal to be presented at the meeting. For securities registered in the names of brokers, a company must attempt to determine the beneficial ownership of the securities and furnish sufficient copies of the proxy statement for distribution to all beneficial owners. Copies of the proxy statement and proxy form must be filed with the SEC when first mailed to shareholders. Under certain circumstances preliminary copies must be filed ten days before mailing. Although a proxy statement does not become "effective" in the same way as a statement registered under the 1933 Act, the SEC may comment on and require changes in the proxy statement before mailing. Proxies for an annual meeting calling for election of directors must include a report containing financial statements covering the previous two fiscal years. Special rules apply when a contest for election or removal of directors is scheduled.

Front 29

SLUSA provides for preclusion of certain securities class actions brought under state law: No covered class action based upon the statutory or common law of any State may be maintained in any State or Federal court by any private party alleging (A) and (B)

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(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or
(B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security. SLUSA does not itself displace state law with federal law but makes some state-law claims nonactionable through the class action device in federal as well as state court.

Front 30

The Williams Act of 1968 amended many sections of the 1934 Securities Exchange Act to address problems with tender offers. Pursuant to the Williams Act, persons making a tender offer that would result in ownership of more than 5 percent of a class of registered securities must

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first file with the SEC and furnish to each offeree a statement that includes the background of the person or group; the source of funds used and the purpose of the acquisition; the number of shares owned; and any relevant contracts, arrangements, or understandings. In addition, the offer must be made to all holders of the class of securities sought, and a uniform price must be paid to all tendering shareholders. A shareholder may withdraw tendered shares at any time while the tender offer remains open. If the person making the offer seeks fewer than all outstanding shares and the response is oversubscribed, shares will be taken up on a pro rata basis.

Front 31

Companies whose securities are traded on a national securities exchange or whose assets are in excess of $10,000,000 and which have equity securities held by more than 500 persons must ___________

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register under the Securities Exchange Act of 1934 and comply with its provisions.

Front 32

The Securities Exchange Act of 1934 prohibits actual fraud in connection with the sale of securities in interstate commerce, as well as fraudulent schemes involving the sale of securities and market manipulation.
No actual fraud is present because the statements by Chute Enterprises' president would not be considered factual since statements regarding FUTURE events are not typically expected to induce_______________ .

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reasonable reliance

Front 33

The 1934 Act requires that issuers regularly file material information with the SEC ____

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(the annual 10-K filing and the quarterly 10-Q filing). The filed reports are available to the public through EDGAR. In the event of a material event, the company must timely issue an 8-K filing that reflects these changed conditions. Tender offers for 5% or more of a registered company must be reported.

Front 34

To establish a claim for damages under Section 10(b) and Rule 10b-5 of Securities Exchange Act of 1934 one must prove

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a misstatement or omission of a material fact, knowingly made (or made with reckless disregard for the truth), relied upon by the injured party, and damages. The plaintiff can be the buyer or seller of securities.

Front 35

Section 301 of the Sarbanes-Oxley Act provides: Each member of the audit committee shall be

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a member of the board of directors of the issuer, and
shall otherwise be independent;
the audit committee of an issuer shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer;
the audit committee shall establish procedures for the "receipt, retention, and treatment of complaints" received by the issuer regarding accounting, internal controls, and auditing;
and, each audit committee shall have the authority to engage independent counsel or other advisors, as it determines necessary to carry out its duties.

Front 36

Workpapers belong to the accountant that prepares them, not the client. The acct-t is prohibited from showing the workpapers to anyone without the client's permission Except

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1. w/papers are subpoenaed and relevant to a court case
2. w/papers must be given to a surviving member of the acct-ts firm
3. a state CPA society review
4. to defend a lawsuit brought by client
5 official investigation of the AICPA
6. GAAP/GAAS requires disclosure

NOTE - a person to whom a CPA sells his or her practice is NOT on the list

Front 37

A minority of states follow the ULTRAMARES decision, which limits CPA liability to _________ and _________

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person in privily if contract with the CPA and intended third party beneficiaries.

Front 38

The majority rule, a CPA's duty to care runs to

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any person or Limited foreseeable class of persons whom the CPA knows will rely on the CPA's work.

Front 39

Section 11 of the 1933 Act
Plaintiff need not to prove_________

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Intent
negligence
privity
or reliance

Front 40

According to ULTRAMARES, the third party that proves _________ will be successful in reaching the CPA without regard to privity;
CPA will NOT be liable to third parties for ___________

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1 Gross negligence
2 Simple negligence

Front 41

Under the provisions of Section 10(b) of the Securities Exchange Act of 1934, an accountant may be held liable if the CPA acted

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Without GOOD FAITH
mere negligence is not enough

Front 42

Securities Exchange Act of 1934 provides for liability in the case of _______ in connection with the purchase or sale of any security.

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an INTENTIONAL misrepresentation or omission of a material fact

Front 43

A CPA will be liable to a Tax client for damages from (3)

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failing to timely file a client's TR
failing to advise a client of certain tax deductions
neglecting to evaluate the option of preparing Joint or Separate returns

Front 44

if a CPA hasn't file a TR for 3 years , he has committed _______

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an act discreditable to the profession

Front 45

A CPA may be held liable to Any party who suffered a loss as a result of ___________

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FRAUD or
GROSS NEGLIGENCE

Front 46

The essential element of 'common law fraud' is an _________

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intent to defraud (SCIENTER) or deceive.
A good defense would be proof that there was a lack of 'scienter'

Front 47

Which of the following bodies promulgates standard of audits of federal financial assistance recipients

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Government Accountability Office

Front 48

CPAs are required to maintain ___________ even if they are not in public practice.

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Integrity and Objectivity

Front 49

____________ is the committee designated by the AICPA to promulgate standards in connection with unaudited financial statements of nonpublic entities that are NOT req. to file F/S

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Accounting and Review Services Committee

Front 50

Which events may justify a departure from a Statement of Financial Accounting Standards

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New legislation
Evolution of a new form of business transacrion