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14. Some auditors claim that increased exposure under Section 404 of the SOX creates a litigation
environment that is unfairly risky for auditors. Do you think that the inability of auditors to
detect a financial statement misstatement due to internal control fraud in a timely manner
should expose auditors to litigation? Why or why not?
An ethical person wants to perform honest work for an honest dollar. Auditors have an obligation of due
care and competency, or another way to say that is the auditors have an obligation not to be negligent.
Auditors should be held to such a standard and should be liable for degrees of negligence and fraud. While
a financial statement audit does not mean internal controls have been audited, it is understood that auditors
will detect material problems with internal controls that lead to materially misstated financial statements.
15. Under Dodd-Frank, whistleblowers can obtain a monetary award if a violation of securities
laws involves potential wrongdoing by an accountant’s auditing firm, including – but not
limited to – failing to comply with the requirements of section 10A of the Exchange Act of 1934.
As a future member of the accounting profession, do you believe you would bring forth such an
allegation and, if so, under what circumstances? If you do not believe you would do so, explain
why not?
Whistle-blowing should be seen as a last resort when all attempts to address and solve the problem within
the organization have failed. As a new staff accountant you would have layers of supervisors who should
review the situation before any whistleblowing decision is considered: the senior, manager, partner-in-
While Dodd-Frank precludes internal accountants and external auditors from receiving whistleblower
awards, it does make an exception for CPAs who report information about potential violations regarding
their own firms’ performance of audit services for a client. This is true even where the CPA’s information
16. The following quotation was in the court ruling in the case of the Public Employees’ Retirement
Association of Colorado v. Deloitte & Touche, LLP:
It is not an accountant’s fault if its client actively conspires with others in order to deprive
the accountant of accurate information about the client’s finances. It would be wrong and
counter to the purposes of the Private Securities Litigation Reform Act to find an
accountant liable in such an instance.
a. Evaluate this statement from the perspective of the scienter requirements discussed in the text.
The statement goes to financial fraud conspiracy by a client where the auditor is not part of the fraud. The
b. Explain the implications of the PSLRA for audit responsibilities and auditor legal liability.
The PSLRA apportions responsibilities and liabilities among the different parties. This
apportioning of liabilities among parties may lessen the auditor’s quest for
knowledge of fraud. If the auditor does not know of the fraud, he cannot be held
17. On December 31, 2009, the SEC sued Alameda, California–based telecommunications company
UTStarcom, Inc., with violations of the Foreign Corrupt Practices Act for authorizing millions of
dollars in unlawful payments by its wholly owned Chinese subsidiary to foreign government
officials in Asia. UTStarcom agreed to settle the SEC’s charges and pay a $1.5 million fine to the
SEC and another $1.5 million to the Department of Justice. One of the items cited as violating the
FCPA was a payment of nearly $7 million between 2002 and 2007 for hundreds of overseas trips
by employees of Chinese government-controlled telecommunications companies that were
customers of UTStarcom, purportedly to provide customer training. In reality the trips were
entirely for sightseeing.
a. Why would such payments by UTStarcom violate the FCPA?
These payments are bribes to foreign government o&cials to induce them to do what
they otherwise would not necessarily be expected to do, absent supporting
b. The FCPA permits a company to assert an affirmative defense against allegations of violating
the FCPA if the payments were lawful under the written laws of the foreign country. Do you
believe it is ethically appropriate to allow such a defense when illegal payments are made?
Why or why not?
The court case sites the $7 million in overseas trips for Chinese government-owned
telecommunications companies that were customers of UTStarcom; these are
considered bribes to obtain or retain business. The case further alleged that
UTStarcom provided lavish gifts and all-expense paid executive training programs in
the U.S. for existing and potential foreign government customers in China and
Thailand; these are considered bribes to obtain or retain business. UTStarcom also
allegedly hired individuals a&liated with foreign government customers to work in
the U.S. and provided work visas, even though the individuals did not work for
UTStarcom. These improper payments to sham consultants in China and Mongolia
18. Given the discussion of the FSGFO in this chapter, comment on the statement that workplaces
based on the FSGFO are better places to work.
FSGFO compliance measures establish a foundation for an organization to build an ethical culture through
ethics codes, training programs, officer-level ethics employees, hot lines, and so on. An ethical culture
starts with top management and permeates every aspect of the organization. The support provided by these
measures helps to create such a culture. An employee should want to work for an ethical company because
19. In her article about possible changes to the legal liability of auditors due to the modification of
GAAS and the audit report as a result of “The Clarity Project,” Nancy Reimer points out that
although the goal of the “clarified standards” is to make GAAS easier to read, understand and
apply, the new modified standards establish a higher “standard of care.” A failure to meet these
modified standards could increase a practitioner’s exposure to legal liability. Explain how the
auditor’s legal liability might increase as a result of changes to the audit report discussed in
Chapter 5.
One of the purposes of the new audit report is to make it more understandable to investors and creditors.
The introduction paragraph will no longer reference in passing the management’s responsibility and the
auditor’s responsibility. Now there will be a full paragraph and section on management’s responsibilities
detailing management’s responsibility for the design, implementation and maintenance of internal controls.
A new section is the auditor’s responsibility which is expanded to include more explicit discussion about
how an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
These additional details are based upon the auditor’s judgment and will call for documentation of the
procedures and testing to back up the auditor’s judgment. Since the new audit report better defines what is
20. Has the accounting profession created a situation in which the auditors’ ethical behavior is
impaired by their professional obligations? How does the profession’s view of such obligations
relate to how courts tend to view the legal liability of auditors?
An example would be client confidentiality. Auditors do have not have auditor-client privilege in federal
courts. It is only available in a small number of state courts. Auditors are not prohibited from reporting
fraud and other violations externally. Under Dodd-Frank they are called upon to make an ethical choice
The confidentiality obligation in the AICPA Code should not be used to mask a CPA’s duties to the public
and investors. An ethical perspective requires that CPAs should question whether complete confidentiality
