Accountants Legal and Ethical Responsibilities. Legal Federal Securities Law Federal Securities Law Contract Contract Negligence Negligence Racketeering

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  • Accountants Legal and Ethical Responsibilities

  • LegalFederal Securities LawContractNegligenceRacketeering Influenced an Corrupt Organizations Act (RICO)Private Securities Litigation Reform act of 1995 (Fraud Detection and Disclosure)Sarbanes-Oxley Act of 2002

  • Securities Act of 1933

    Objective: To provide prospective investors with accurate, complete, and detailed information about new offerings of securities.

  • Securities Act of 1933Requires that all new issues of securities sold in interstate commerce must be registered with the SEC before sale, unless exempted. Registration includes certified financial statements and prospectus. Prospectus must also be given to each new purchaser.

  • Civil and Criminal Penalties for ViolationLiability extends to Issuer, under writer, directors/partners, all signers, and experts (accountants and attorneys) who prepared or certified part of registration statement. CPA liable for false, misleading or omitted information.Plaintiff need not prove reliance by plaintiff Due diligence (reasonable grounds to believe accuracy) is defense.

  • Civil and Criminal Penalties for Violationa. Criminal fine and/or imprisonment. Fines up to $10,000 and/or imprisonment up to five years.

    b. Civil Monetary damages to investors if there is a failure to register, registration statement or prospectus contained materially false, misleading factual information, or omitted material factual information.

  • ContractDuty determined by terms of engagement letter.Liability extends to intended beneficiaries known to accountant.Lending institutions

  • NegligenceA. Duty of professional careB. Failure to act in accordance with those dutiesC. Proximate causeD. Loss of damage Liable to client, known third parties, and possibly foreseen parties (same class as known third parties)

  • FraudRequires knowledge, or grossly negligent or reckless conduct.Extends liability to reasonably foreseeable third parties.

  • Securities Exchange Act of 1934Regulates ongoing trading of securities after issuance. 1. Prohibits Fraud (Section 10b,Rule 10b-5Knowing issuance of financial reports containing false, misleading information or omitting material information in a report.(Plaintiff must prove intent and reliance.)

  • Racketeer Influenced and Corrupt Organizations Act (1970)Federal Crime to engage in racketeering activity in the acquisition, maintenance or conduct of the affairs of a business enterprise or to conspire to do any racketeering activities.Incorporates by reference 26 federal crimes and 9 state felonies, including: securities fraud, mail fraud and wire fraud. Requires two or more offenses.

  • RICOCommission of two or more predicate acts within a 10 year period

  • Racketeer Influenced and Corrupt Organizations Act (1970PenaltiesCriminal - $25,000 per violationUp to twenty years imprisonmentCivil Government : Divestiture or dissolution of businessPrivate: Treble damages, Attorneys fees

  • Private Securities Litigation Reform act of 1995Requires audits of financial statement includestandards designed to provide reasonable assuranceof detecting illegal acts that have material effect onfinancial statements

    Requires notification to audit committee

    Notification to corporate board if audit committee does not act.

    Notification to SEC if board does not notify SEC

  • Duty of InquiryIf CPA becomes aware of suspicious circumstances, he/she has a duty to inquire

    A CPA cannot rely on Management's representations.

  • Sarbanes-Oxley Act of 2002Creates a five-member public company accounting oversight board. The Board will have five financially-literate members, appointed for five-year terms. Two of the members must be or have been certified public accountants, and the remaining three must not be and cannot have been CPAs. Members of the Board are appointed by the Securities and Exchange Commission, "after consultation with" the Chairman of the Federal Reserve Board and the Secretary of the Treasury.

  • Section 103: Auditing, Quality Control, And Independence Standards And Rules.

    The Board shall: (1) register public accounting firms; (2) establish, or adopt, by rule, "auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers;" (3) conduct inspections of accounting firms; (4) conduct investigations and disciplinary proceedings, and impose appropriate sanctions

  • Standard SettingThe Board would be required to "cooperate on an on-going basis" with designated professional groups of accountants and any advisory groups convened in connection with standard-setting,

  • Section 104: Inspections of Registered Public Accounting Firms

    Annual quality reviews (inspections) must be conducted for firms that audit more than 100 issues, all others must be conducted every 3 years. The SEC and/or the Board may ordera special inspection of any firm at any time.

  • Section 201: Services Outside The Scope Of Practice Of Auditors; Prohibited Activities.

    It shall be "unlawful" for a registered publicaccounting firm to provide any non-audit service toan issuer contemporaneously with the audit,including: (1)bookkeeping or other services related to the accounting records or financial statements of the audit client; (2)financial information systems design and implementation; (3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports;

  • Section 201: Services Outside The Scope Of Practice Of Auditors; Prohibited Activities.

    (4) actuarial services;

    (5) internal audit outsourcing services;

    (6) management functions or human resources;

    (7) broker or dealer, investment adviser, or investment banking services;

  • Section 201: Services Outside The Scope Of Practice Of Auditors; Prohibited Activities.

    8) legal services and expert services unrelated to the audit; (9) any other service that the Board determines, by regulation, is impermissible.The Board may, on a case-by-case basis, exempt fromthese prohibitions any person, issuer, publicaccounting firm, or transaction, subject to review bythe Commission.

  • Section 203: Audit Partner Rotation.

    The lead audit or coordinating partner and thereviewing partner must rotate off of the auditevery 5 years.

  • Section 302: Corporate Responsibility For Financial Reports.The CEO and CFO of each issuer shall prepare statement to accompany the audit report to certify the

    appropriateness of the financial statements and disclosures contained in the periodic report, and

    that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer."

  • Section 401(a): Disclosures In Periodic Reports; Disclosures Required.Each financial report that is required to be prepared in accordance with GAAP shall

    reflect all material correcting adjustments . . . that have been identified by a registered accounting firm . . . ."

    "Each annual and quarterly financial report . . . shall disclose all material off-balance sheet transactions" and "other relationships" with "unconsolidated entities" that may have a material current or future effect on the financial condition of the issuer.

  • Section 401(a): Disclosures In Periodic Reports; Disclosures Required.The SEC shall issue rules providing that pro forma financial information must be presented so as not to "contain an untrue statement" or omit to state a material fact necessary in order to make the pro forma financial information not misleading.

  • Title VIII: Corporate and Criminal Fraud Accountability Act of 2002. Felony to "knowingly" destroy or createdocuments to "impede, obstruct orinfluence any existing or contemplatedfederal investigation.Auditors are required to maintain "allaudit or review work papers" for fiveyears.

  • Title IX: White Collar Crime Penalty Enhancements

    Maximum penalty for mail and wire fraud increased from 5 to 10 years.SEC may prohibit anyone convicted of securities fraud from being an officer or director of any publicly traded company.Maximum penalties for willful and knowing violations of this section are a fine of not more than $5,000,000 and/or imprisonment of up to 20 years.

  • Professional ResponsibilitiesAICPA Code of Professional ConductPrinciplesA. CPA should exercise sensitive professional and moral judgment in all CPA activities.B. Demonstrate commitment to professionalismC. Perform responsibilities with integrity to maintain public confidence.

  • Professional Responsibilities4. Maintain objectivity and be free of conflicts of interest.5. Be independent in fact and in appearance.6. Strive to improve competence and quality of services and discharge duties to best of his/her ability.

  • RulesRule 101 IndependenceCPA shall be independent in the performance of professional services rendered. (Tax and consulting do not require independence)

  • Independence Rule 101Impaired by:Direct or material indirect financial interest in clientTrustee or executor of trust or estate which has financial interest in clientJoint of closely-held business investment with client or officer, director of principal stockholder.

    (Fee outstanding for service performed more than one year prior to audit takes on characteristics of a loan from accountant to client.)

  • Competence (Rule 201)CPA should not undertake any engagement that the CPA cannot reasonably expect to complete with professional competence.

  • Confidentiality (Rule 301)CPA should not disclose any confidential informa