978-1259638855 Chapter 46 Part 2

Unlock access to all the studying documents.

View Full Document

Chapter 46 – Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals

46–10

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

agreements and credit evaluations, inquired about deficiencies, verified

securities borrowing reports, tested internal control activities, identified

reconciliations of balance sheet cash and bank accounts as well as balance sheet

or defraud.

3) Proportionate Liability: Note how law changes in 1995 reduced the amount of

liability of auditors and securities professionals.

1219-1222. Note especially the effects of the Janus case, note in Chapter 46 at

page 1252.

Examples: Problem Cases ## 8 and 9.

5) Example: Chapter Introductory Problem (p. 1233).

6) Additional Examples: Problem Case # 7.

D. Securities Analysts’ Conflicts of Interest, Sarbox, and the Dodd-Frank Act

1. Congress, the SEC, the NYSE, and the NASD have addressed analysts’ conflicts of

when a firm is underwriting a public issuance. Do your students think that in practice

reports?

requirements of SOX?

3. Ethics in Action: Securities and Investment Banking Firms Lose and Settle Conflict of

and investment banking arms?

5. Example: Problem Case # 8.

E. Limiting Professionals’ Liability

F. Qualified Opinions and Disclaimers of Opinions

1. Note that the issuance of qualified opinions, disclaimers of opinion, adverse opinions,

issued.

2. In recent years, the SEC has concentrated its enforcement efforts on opinion shopping:

corporations improving their bottom line by shopping around for the most favorable

46–11

G. Criminal, Injunctive, and Administrative Proceedings

1. Criminal liability. Note that criminal intent is required to impose criminal liability on a

professional, whether under the securities laws, tax laws, mail fraud statutes, or other

statutes.

United States v. Natelli (p. 1257). Note that Natelli and Scansaroli were prosecuted for

commitment was made available to Natelli should have put him on notice of its being

fictitious. Scansaroli was not liable for this misstatement for he had no discretion

whether to book the commitment. He had no information that would alert him to its

falsity. Both Natelli and Scansaroli were responsible for not noting the effect of bad

willful violation of the 1934 Act.

Note also that the court based its finding of an intent to conceal the write–offs on its

determination that Natelli had not followed GAAP in booking 1968 sales. His desire to

avoid criticism and liability gave him a powerful motive to conceal the write-offs of the

receivables based on the fictitious sales.

other professionals today. Ask your students what they would have done had they been

faced with the same dilemma faced by Natelli and Scansaroli.

1262.

3. Professionals’ Liability for Preparation of Tax Returns. Among the duties and liabilities

under the Internal Revenue Code are the following:

a. A tax preparer must not

the income derived from the tax shelter;

corporation;

Chapter 46 – Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals

46–12

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

6) take a deduction on a client’s return without assurances by the client that

documentation of the deduction exists. The tax preparer is not required to

investigate the documentation but must have no reason to doubt the client;

7) understate a client’s tax liability by taking a unrealistic position with regard to

the treatment of an item under the tax laws, unless the tax preparer acted in good

faith and had a reasonable cause to take the position. The penalty is $250;

8) negotiate a client’s income tax refund check, unless it is deposited into the

client’s account. The penalty is $500;

criminally prosecuted.

b. Notice of Assessments by the IRS.

4. SEC and NASD Proceedings

a. Note the impact of a successful 102(e) proceeding against an accountant: an

accountant may lose the privilege of engaging in a part of her accounting practice.

Example: Problem Case # 11.

b. The NASD also has power to discipline its members.

H. 1934 Act Audit Requirements

1. Section 10A: carefully list the requirements of Section 10A of the 1934 Act, which

Example: Problem Case # 12.

I. Working Papers

1. Note that an accountant’s work papers belong to the accountant, but that his client has a

right of access to them. The client may copy the work papers at her own expense. Note,

partner in an accounting partnership may give confidential information to his partners,

including when the partner retires and his partners continue the business. An

underwriter may disclose confidential information pursuant to a subpoena issued to a

time you may want to cover the Arthur Andersen case on page 1262.

Chapter 46 – Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals

46–13

J. Professional-Client Privilege

1. State law

the client. An accountant who does not wish to disclose a client’s confidential

communication at a legal proceeding must disclose it if the client waives the

privilege. The privilege would apply only to communications that are necessary to

the accountant’s performance of her duties to her client.

presented in court, many state legislatures have been persuaded that the benefits of

the privilege outweigh its costs.

2. Federal law. Currently, no professional-client privilege is recognized in federal law,

except for attorneys. For accountants and securities professionals, however, the obstacle

will be covered by the attorney-client privilege.

K. Arthur Andersen LLP v. U.S. (p. 1262): You may want to cover this case during your

coverage of criminal violations or working papers. The Supreme Court held that Arthur

Andersen was not guilty of obstructing justice when it shredded documents regarding its

audit of Enron. Note that subsequent to this decision in December 2005, DOJ decided to

tool. The facts show that Duncan and others at Andersen knew that a criminal action was

imminent, but since no action had been commenced against Enron or Andersen and no

subpoena had been served on Enron or Andersen, Andersen’s employees continued to shred

documents. Does that mean that what Andersen did was not criminal? No, the Supreme

do after seven years have passed? Probably shred all documents except those showing that

the auditor has done a creditable job.

Chapter 46 – Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals

46–14

IV. RECOMMENDED REFERENCES

A. Berger, Accountants’ Liability after Enron (2002).

B. Bloomenthal, Sarbanes-Oxley Act in Perspective (2014-2015 ed.).

C. Causey, Duties and Liabilities of Public Accountants (7th ed. 2002).

regulation.

E. Epstein & Spalding, The Accountant’s Guide to Legal Liability and Ethics (1993).

F. Goldwasser & Arnold, Accountants’ Liability (2014).

G. Haft & Hudson, Liability of Attorneys and Accountants for Securities Transactions (2014).

H. Haas & Howard, Investment Adviser Regulation in a Nutshell (2008).

See also the securities regulation references in Chapter 45.

V. ANSWERS TO PROBLEM CASES:

1. Yes. Since E&W failed to provide a turnkey system as promised, it was liable for

2. Yes. Rizek was permanently barred from the securities industry because he churned

Donato’s account in violation of Rule 10b-5. Churning requires (1) control of the customer’s

account by the broker, (2) excessive trading in light of the customer’s investment objectives,

and (3) scienter, the required state of mind for liability under Section 10(b). Rizek was well

required that Prospect and the other funds prove that they suffered damages (1) as the person

or one of a limited group of persons for whose benefit and guidance Grant Thornton intended

to supply the information or knew that Epic intended to supply it and (2) through reliance

upon the information in a transaction that Grant Thornton intended the information to

bondholders, mere knowledge of their existence was not sufficient to place them in a

protected class able to recover from Grant Thornton for fraud. Grant Thornton LLP v.

Prospect High Income Fund, 314 S.W.3d 913 (Tex. S. Ct. 2010).

4. In part. PW failed to prove that its client’s negligence caused any of the client’s damages not

46–15

PW showed Scioto caused some of its harm. While Scioto’s lack of insurance proved that its

negligence caused damages attributable to the fire, the damages from Scioto’s proceeding

project.

In this case, the court did not limit an accountant’s ability to use a client’s comparative

negligence as a defense to situations only when the client interfered with the accountant’s

performance of its duties. Instead, the Supreme Court of Ohio rejected the audit interference

rule and, consistent with the current status of comparative negligence in tort law, held that a

5. Possibly. The court held that summary judgment for PW, the auditor, was inappropriate

because there was sufficient evidence from which a jury may conclude that Marcus Brothers

43 of Piece Goods’s trade creditors had in fact received Piece Goods’s financial statements.

Probably also the court thought the depositions of PW’s partner and manager were self

information “may” be relied on. Instead, the auditor must know it “will” be relied on.

The majority rejected the foreseeability test because it thought it was too expansive. It

1999).

6. No. Ellis failed to show that Grant Thornton knew (or intended) that potential employees,

prepared for the benefit of Keystone and the OCC, which is entirely consistent with the

F.3d 280 (4th Cir. 2008).

7. Yes for Section 11, but not for Section 12(a)(2) and Rule 10b-5. AccentPoint has no Rule

10b-5 liability, because it did not act with scienter, which requires intent or knowledge of the

because its only role is to be an auditor who issues an opinion. AccentPoint also does not

have a financial interest in the sale, as it receives an audit fee that is not dependent on the

audit opinion. AccentPoint will be liable to purchasers of the securities who prove they

Chapter 46 – Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals

46–16

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

suffered damages. AccentPoint will have potential liability under the common law of

negligent misrepresentation in states applying the Restatement or foreseeable users test, as

AccentPoint knows the class of purchasers who will read and rely on its audit opinion. It is

unlikely that AccentPoint will be liable for negligent misrepresentation in an Ultramares

purchasers.

8. Yes. Applying the rule of the Janus case discussed on page 1252, the court held that Daifotis

or for attribution in the fund’s written materials. SEC v. Daifotis, 2011 U.S. Dist. LEXIS

83872 (N.D. Calif., August 1, 2011)

9. The court held that Cross could be held liable as a primary violator of section 10(b) and Rule

that could be the basis of primary liability, including his issuing unqualified opinions

Production Co., .77 F.3d 1215 (10th Cir. 1996).

10. No. The court rejected plaintiffs’ argument that Palaschuk’s resistance when DTTC proposed

would have revealed the fraud earlier, and resistance to those audit procedures always

relevant standards. This leads to an inference of laziness at worst, but not recklessness.

The court also found that the plaintiff’s complaint did “little more than allege that, had

DTTC performed a better audit, Longtop’s fraud would have been uncovered sooner.” The

court stated that the most compelling inference from the complaint was that DTTC was

DTTC to uncover Longtop’s fraud came about as a result of DTTC’s efforts. The court held

that the fact Longtop stayed one step ahead of DTTC did not justify the assertion of liability

of DTTC. In short, because the facts alleged by the plaintiff fell far short of showing that

DTTC conducted “no audit at all,” plaintiffs did not adequately alleged that DTTC was

Chapter 46 – Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals

46–17

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Commission’s Rules of Practice. In the Matter of John Kinross-Kennedy, CPA, Securities

Exchange Act Release No. 71154 (December 20, 2013).

12. Although this question is short and simple, the answer to this question was not intended to be

http://www.deloitte.com/assets/Dcom-

Shared%20Assets/Documents/us_assur_TakingControlAug2004.pdf