Accountants Legal Accountants Legal and Ethical and Ethical ResponsibilitiesResponsibilities

LegalLegal

Federal Securities LawFederal Securities Law ContractContract NegligenceNegligence Racketeering Influenced an Corrupt Racketeering Influenced an Corrupt

Organizations Act (RICO)Organizations Act (RICO) Private Securities Litigation Reform act Private Securities Litigation Reform act

of 1995 (Fraud Detection and of 1995 (Fraud Detection and Disclosure)Disclosure)

Sarbanes-Oxley Act of 2002Sarbanes-Oxley Act of 2002

Securities Act of 1933Securities Act of 1933

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

Securities Act of 1933Securities Act of 1933

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

Civil and Criminal Penalties Civil and Criminal Penalties for Violationfor Violation

Liability extends to Issuer, under writer, Liability extends to Issuer, under writer, directors/partners, all signers, and experts directors/partners, all signers, and experts ((accountantsaccountants and attorneys) who prepared and attorneys) who prepared or certified part of registration statement. or certified part of registration statement. CPA liable for false, misleading or omitted CPA liable for false, misleading or omitted information.information.

  Plaintiff need not prove reliance by plaintiffPlaintiff need not prove reliance by plaintiff

Due diligence (reasonable grounds to believe Due diligence (reasonable grounds to believe accuracy) is defense.accuracy) is defense.

Civil and Criminal Penalties Civil and Criminal Penalties for Violationfor Violation

a.a.              Criminal – fine and/or imprisonment. Criminal – fine and/or imprisonment. Fines up to $10,000 and/or imprisonment up Fines up to $10,000 and/or imprisonment up to five years.to five years.

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

ContractContract

Duty determined by terms of Duty determined by terms of engagement letter.engagement letter.

Liability extends to intended Liability extends to intended beneficiaries known to beneficiaries known to accountant.accountant.– Lending institutionsLending institutions

NegligenceNegligence

A. Duty of professional careA. Duty of professional care B. Failure to act in accordance with B. Failure to act in accordance with

those dutiesthose duties C. Proximate causeC. Proximate cause D. Loss of damage D. Loss of damage Liable to client, known third Liable to client, known third

parties, and possibly foreseen parties, and possibly foreseen parties (same class as known third parties (same class as known third parties)parties)

FraudFraud Requires knowledge, or grossly Requires knowledge, or grossly

negligent or reckless conduct.negligent or reckless conduct. Extends liability to reasonably Extends liability to reasonably

foreseeable third parties.foreseeable third parties.

Securities Exchange Act of Securities Exchange Act of 19341934

Regulates ongoing trading of securities Regulates ongoing trading of securities after issuance.after issuance. 1. Prohibits Fraud 1. Prohibits Fraud

(Section 10b,Rule 10b-5(Section 10b,Rule 10b-5 Knowing issuance of financial reports Knowing issuance of financial reports

containing false, misleading information containing false, misleading information or omitting material information in a or omitting material information in a report.report.(Plaintiff must prove intent and reliance.)(Plaintiff must prove intent and reliance.)

Racketeer Influenced and Racketeer Influenced and Corrupt Organizations Act Corrupt Organizations Act (1970)(1970)

Federal Crime to engage in racketeering Federal Crime to engage in racketeering activity in the acquisition, maintenance activity in the acquisition, maintenance or conduct of the affairs of a business or conduct of the affairs of a business enterprise or to conspire to do any enterprise or to conspire to do any racketeering activities.racketeering activities.

Incorporates by reference 26 federal Incorporates by reference 26 federal crimes and 9 state felonies, including: crimes and 9 state felonies, including: securities fraud, mail fraud and securities fraud, mail fraud and wire fraud. wire fraud. Requires two or more Requires two or more offenses.offenses.

RICORICO

Commission of two or more Commission of two or more “predicate acts” within a 10 year “predicate acts” within a 10 year periodperiod

Racketeer Influenced and Racketeer Influenced and Corrupt Organizations Corrupt Organizations Act (1970Act (1970 PenaltiesPenalties Criminal - $25,000 per violationCriminal - $25,000 per violation

– Up to twenty years imprisonmentUp to twenty years imprisonment Civil – Government : Divestiture or Civil – Government : Divestiture or

dissolution of businessdissolution of business Private: Treble damages, Private: Treble damages,

Attorneys feesAttorneys fees

Private Securities Private Securities Litigation Reform act of Litigation Reform act of 19951995Requires audits of financial statement includeRequires audits of financial statement includestandards designed to provide reasonable standards designed to provide reasonable

assuranceassuranceof detecting illegal acts that have material effect onof detecting illegal acts that have material effect onfinancial statementsfinancial statements

Requires notification to audit committeeRequires notification to audit committee

Notification to corporate board if audit committee Notification to corporate board if audit committee does not act.does not act.

Notification to SEC if board does not notify SECNotification to SEC if board does not notify SEC

Duty of InquiryDuty of Inquiry

If CPA becomes aware of If CPA becomes aware of suspicious circumstances, he/she suspicious circumstances, he/she has a duty to inquirehas a duty to inquire

A CPA cannot rely on A CPA cannot rely on Management's representations.Management's representations.

Sarbanes-Oxley Act of Sarbanes-Oxley Act of 20022002 Creates a five-member public company Creates a five-member public company

accounting oversight board. The Board will accounting oversight board. The Board will have five financially-literate members, have five financially-literate members, appointed for five-year terms. Two of the appointed for five-year terms. Two of the members must be or have been certified members must be or have been certified public accountants, and the remaining three public accountants, and the remaining three must not be and cannot have been CPAs. must not be and cannot have been CPAs.

Members of the Board are appointed by the Members of the Board are appointed by the Securities and Exchange Commission, "after Securities and Exchange Commission, "after consultation with" the Chairman of the consultation with" the Chairman of the Federal Reserve Board and the Secretary of Federal Reserve Board and the Secretary of the Treasury.the Treasury.

Section 103: Auditing, Quality Section 103: Auditing, Quality Control, And Independence Control, And Independence

Standards And RulesStandards And Rules..

The Board shall: The Board shall:

(1) register public accounting firms; (1) register public accounting firms;

(2) establish, or adopt, by rule, "auditing, (2) establish, or adopt, by rule, "auditing, quality control, ethics, independence, and quality control, ethics, independence, and other standards relating to the preparation other standards relating to the preparation of audit reports for issuers;" of audit reports for issuers;"

(3) conduct inspections of accounting firms; (3) conduct inspections of accounting firms;

(4) conduct investigations and disciplinary (4) conduct investigations and disciplinary proceedings, and impose appropriate proceedings, and impose appropriate sanctionssanctions

Standard SettingStandard Setting

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

Section 104: Inspections of Section 104: Inspections of Registered Public Accounting FirmsRegistered Public Accounting Firms

Annual quality reviews Annual quality reviews (inspections) must be conducted (inspections) must be conducted for firms that audit more than 100 for firms that audit more than 100 issues, all others must be issues, all others must be conducted every 3 years. The SEC conducted every 3 years. The SEC and/or the Board may orderand/or the Board may order

a special inspection of any firm at a special inspection of any firm at any time.any time.

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

It shall be "unlawful" for a registered publicIt shall be "unlawful" for a registered publicaccounting firm to provide any non-audit accounting firm to provide any non-audit

service toservice toan issuer contemporaneously with the audit,an issuer contemporaneously with the audit,including: including: (1)bookkeeping or other services related to the (1)bookkeeping or other services related to the

accounting records or financial statements of accounting records or financial statements of the audit client; the audit client;

(2)financial information systems design and (2)financial information systems design and implementation; implementation;

(3) appraisal or valuation services, fairness (3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports; opinions, or contribution-in-kind reports;

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

(4) actuarial services; (4) actuarial services;

(5) internal audit outsourcing services; (5) internal audit outsourcing services;

(6) management functions or human (6) management functions or human resources; resources;

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

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

8) legal services and expert services 8) legal services and expert services unrelated to the audit; unrelated to the audit;

(9) any other service that the Board (9) any other service that the Board determines, by regulation, is determines, by regulation, is impermissible.impermissible.

The Board may, on a case-by-case basis, exempt The Board may, on a case-by-case basis, exempt fromfrom

these prohibitions any person, issuer, publicthese prohibitions any person, issuer, publicaccounting firm, or transaction, subject to review accounting firm, or transaction, subject to review

bybythe Commission. the Commission.

Section 203: Audit Section 203: Audit Partner Rotation.Partner Rotation.

The lead audit or coordinating The lead audit or coordinating partner and thepartner and the

reviewing partner must rotate off of reviewing partner must rotate off of the auditthe audit

every 5 years.every 5 years.

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

the the

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

that those financial statements and disclosures that those financial statements and disclosures fairlyfairly

present, in all material respects, the operations present, in all material respects, the operations and financial condition of the issuer." and financial condition of the issuer."

Section 401(a): Disclosures In Section 401(a): Disclosures In Periodic Reports; Disclosures Periodic Reports; Disclosures Required.Required.

Each financial report that is required to be prepared in Each financial report that is required to be prepared in accordance with GAAP shall accordance with GAAP shall

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

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

Section 401(a): Disclosures In Section 401(a): Disclosures In Periodic Reports; Disclosures Periodic Reports; Disclosures Required.Required.

The SEC shall issue rules The SEC shall issue rules providing that pro forma financial providing that pro forma financial information must be presented so information must be presented so as not to "contain an untrue as not to "contain an untrue statement" or omit to state a statement" or omit to state a material fact necessary in order material fact necessary in order to make the pro forma financial to make the pro forma financial information not misleading.information not misleading.

Title VIII: Corporate and Title VIII: Corporate and Criminal Fraud Criminal Fraud Accountability Act of Accountability Act of 2002.2002. Felony to "knowingly" destroy or createFelony to "knowingly" destroy or create

documents to "impede, obstruct ordocuments to "impede, obstruct or

influence“ any existing or contemplatedinfluence“ any existing or contemplated

federal investigation.federal investigation.

Auditors are required to maintain "allAuditors are required to maintain "all

audit or review work papers" for fiveaudit or review work papers" for five

years.years.

Title IX: White Collar Crime Title IX: White Collar Crime Penalty EnhancementsPenalty Enhancements

Maximum penalty for mail and wire Maximum penalty for mail and wire fraud increased from 5 to 10 years.fraud increased from 5 to 10 years.

SEC may prohibit anyone convicted of SEC may prohibit anyone convicted of securities fraud from being an officer or securities fraud from being an officer or director of any publicly traded company.director of any publicly traded company.

Maximum penalties for willful and Maximum penalties for willful and knowing violations of this section are a knowing violations of this section are a fine of not more than $5,000,000 and/or fine of not more than $5,000,000 and/or imprisonment of up to 20 years.imprisonment of up to 20 years.

Professional Professional ResponsibilitiesResponsibilitiesAICPA Code of Professional ConductAICPA Code of Professional ConductPrinciplesPrinciples A. CPA should exercise sensitive A. CPA should exercise sensitive

professional and moral professional and moral judgmentjudgment in all in all CPA activities.CPA activities.

B. Demonstrate commitment to B. Demonstrate commitment to professionalismprofessionalism

C. Perform responsibilities with C. Perform responsibilities with integrityintegrity to to maintain maintain public public confidenceconfidence..

Professional Professional ResponsibilitiesResponsibilities 4. Maintain 4. Maintain objectivity objectivity and be and be free free

of of conflicts of interest.conflicts of interest. 5. Be 5. Be independentindependent in fact and in in fact and in

appearance.appearance. 6. Strive to improve 6. Strive to improve competencecompetence

and and quality quality of services and of services and discharge duties discharge duties to best of to best of his/her ability.his/her ability.

RulesRules

Rule 101 – IndependenceRule 101 – Independence

A.A. CPA shall be independent in the CPA shall be independent in the performance of professional performance of professional services rendered. (Tax and services rendered. (Tax and consulting do not require consulting do not require independence)independence)

Independence Rule Independence Rule 101101 Impaired by:Impaired by:

– Direct or material indirect financial interest Direct or material indirect financial interest in clientin client

– Trustee or executor of trust or estate which Trustee or executor of trust or estate which has financial interest in clienthas financial interest in client

– Joint of closely-held business investment Joint of closely-held business investment with client or officer, director of principal with client or officer, director of principal stockholder.stockholder.

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

Competence (Rule Competence (Rule 201)201) CPA should not undertake any CPA should not undertake any

engagement that the CPA cannot engagement that the CPA cannot reasonably expect to complete reasonably expect to complete with professional competence.with professional competence.

Confidentiality (Rule Confidentiality (Rule 301)301) CPA should not disclose any CPA should not disclose any

confidential information obtained confidential information obtained in the course of an engagement in the course of an engagement without consent of the client, without consent of the client, unless required to do so by law, unless required to do so by law, AICPA regulations or state CPA AICPA regulations or state CPA societies.societies.

Contingent Fees (Rule Contingent Fees (Rule 302)302) Professional services should not be Professional services should not be

rendered under a contingent fee basis.rendered under a contingent fee basis.

Prohibited for the filing of an origial or Prohibited for the filing of an origial or amended tax return. However, amended tax return. However, permitted for representing a client in permitted for representing a client in an examination of a client’s tax return.an examination of a client’s tax return.

Discreditable Acts Discreditable Acts (Rule 501(Rule 501 CPA should not commit an act in CPA should not commit an act in

personal or professional life that personal or professional life that discredits the professiondiscredits the profession