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76.
Assume a securities lawyer has just received a phone call from her client, the Chief
Financial Officer (CFO) of XYZ Corporation, and informed that a securities lawsuit may be
filed against her client by a group of the company’s shareholders. XYZ’s share price
recently dropped from $40 to $4 per share after the company announced that it had to
restate its quarterly results. The shareholders also learned that the CFOs compensation
package ($20 million) is tied to the attainment of a $40 common stock share price.
Although her client is innocent, the attorney believes the shareholders will view this as a
case of securities fraud and file the suit against the CFO, alleging that due to the large
compensation, the client stood to gain from reaching the share price, and with the client’s
ability to influence the company’s revenue, the CFO possessed the motive and opportunity
to defraud XYZ’s investors.
Why might the facts of this case lead the attorney to conclude that a lawsuit against her
client is imminent? How might the attorney assert a valid “good faith” defense?
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77.
Auditors may be held liable to both their clients and third parties under common law.
a. What must a client prove to recover its losses from an auditor under common law?
b. What must a third party prove to recover losses from an auditor under common law?
c. How does an auditor’s ethical obligations and liability under common law intersect?
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78.
Lotus Hospitality, a U.S. publicly-owned company doing business in China, deals with
state-owned enterprises in a variety of countries. It is common for Chinese companies to
pay custom officials in these countries amounts ranging from $100–$500 to enable their
goods to be off-loaded at the receiving docks in each country. To show its appreciation for
the many years of doing business in these countries, Lotus invited 50 government officials
and employees of state-owned enterprises to attend the Olympic Games in China at the
company’s expense, and ultimately paid for such guests as well as some spouses and
others who attended along with them. Sponsored guests were primarily from countries in
Africa and Asia, and they enjoyed three- and four-day hospitality packages that included
event tickets, luxury hotel accommodations, and sightseeing excursions valued at $12,000
to $16,000 per package. In return for the generosity of Lotus Hospitality, the state-owned
enterprises promised to give preference to Chinese companies when multi–million dollar
contracts are awarded.
Describe the nature of these payments under the Foreign Corrupt Practices Act (FCPA)
and assess their legality. What are the potential ethical issues of allowing certain types of
payments under the Act?
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79.
Do considerations of culture have a place in the FCPA? Discuss in general and with
respect to Hofstede’s cultural values.
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80.
Explain the provisions of section 302 of the Sarbanes-Oxley Act including obligations of
officers; nature and scope of assertions; accounting requirements; and legal liability of
officers.
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81.
In chapter 4 we discussed the rules for independence. Auditor violations of independence
can cause legal liability issues for the individual auditor and, perhaps, the audit firm.
Describe situations where auditor legal liability has occurred as a result of independence
violations and identify other situations addressed in the AICPA Code that could lead to
legal liability.
