Accountants Legal and Ethical Responsibilities

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Accountants Legal and Ethical Responsibilities
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Legal

• Federal Securities Law
• Contract
• Negligence
• Racketeering Influenced an Corrupt Organizations
  Act (RICO)
• Private Securities Litigation Reform act of 1995
  (Fraud Detection and Disclosure)
• Sarbanes-Oxley Act of 2002

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Securities Act of 1933

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

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Securities Act of 1933

• Requires 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.

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Civil and Criminal Penalties for Violation

• Liability 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.

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Civil and Criminal Penalties for Violation

• a.       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.

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Contract

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

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Negligence

• A. Duty of professional care
• B. Failure to act in accordance with those duties
• C. Proximate cause
• D. Loss of damage
• Liable to client, known third parties, and
  possibly foreseen parties (same class as known
  third parties)

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

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Securities Exchange Act of 1934

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

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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.

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RICO

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

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Racketeer Influenced and Corrupt Organizations
Act (1970

• Penalties
• Criminal - 25,000 per violation
• Up to twenty years imprisonment
• Civil Government Divestiture or dissolution
  of business
• Private Treble damages, Attorneys fees

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Private Securities Litigation Reform act of 1995

• Requires audits of financial statement include
• standards designed to provide reasonable
  assurance
• of detecting illegal acts that have material
  effect on
• financial 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

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Duty of Inquiry

• If CPA becomes aware of suspicious circumstances,
  he/she has a duty to inquire
• A CPA cannot rely on Management's
  representations.

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Sarbanes-Oxley Act of 2002

• Creates 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.

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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

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Standard Setting

• The 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,

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

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

• It shall be "unlawful" for a registered public
• accounting firm to provide any non-audit service
  to
• an 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

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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

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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
  from
• these prohibitions any person, issuer, public
• accounting firm, or transaction, subject to
  review by
• the Commission.

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Section 203 Audit Partner Rotation.

• The lead audit or coordinating partner and the
• reviewing partner must rotate off of the audit
• every 5 years.

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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."

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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.

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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.

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Title VIII Corporate and Criminal Fraud
Accountability Act of 2002.

• Felony to "knowingly" destroy or create
• documents to "impede, obstruct or
• influence any existing or contemplated
• federal investigation.
• Auditors are required to maintain "all
• audit or review work papers" for five
• years.

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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.

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Professional Responsibilities

• AICPA Code of Professional Conduct
• Principles
• A. CPA should exercise sensitive professional
  and moral judgment in all CPA activities.
• B. Demonstrate commitment to professionalism
• C. Perform responsibilities with integrity to
  maintain public confidence.

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Professional Responsibilities

• 4. 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.

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Rules

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

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Independence Rule 101

• Impaired by
• Direct or material indirect financial interest in
  client
• Trustee or executor of trust or estate which has
  financial interest in client
• Joint 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.)

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Competence (Rule 201)

• CPA should not undertake any engagement that the
  CPA cannot reasonably expect to complete with
  professional competence.

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Confidentiality (Rule 301)

• CPA should not disclose any confidential
  information obtained in the course of an
  engagement without consent of the client, unless
  required to do so by law, AICPA regulations or
  state CPA societies.

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Contingent Fees (Rule 302)

• Professional services should not be rendered
  under a contingent fee basis.
• Prohibited for the filing of an origial or
  amended tax return. However, permitted for
  representing a client in an examination of a
  clients tax return.

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Discreditable Acts (Rule 501

• CPA should not commit an act in personal or
  professional life that discredits the profession