CHAPTER 4 -LEGAL LIABILITY

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CHAPTER 4 -LEGAL LIABILITY
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CHANGED LEGAL ENVIRONMENT

• EXPANDING LIABILITY
• AWARENESS OF CPAS AS DEFENDENTS
• GREATER COMPLEXITY OF ACCOUNTING AND AUDITING
• DEEP POCKETS
• CONTINGENT FEES
• WILLINGNESS TO SETTLE
• TRIAL BY PEERS

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FAILURES

• BUSINESS FAILURES
• BAD JUDGMENTS, POOR BUSINESS
• AUDIT FAILURES
• BAD AUDITING
• AUDIT RISK
• RISK OF REACHING WRONG CONCLUSION ABOUT F/S

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LEGAL CONCEPTS

• PRUDENT PERSON CONCEPT
• DUTY TO EXERCISE SKILL AS IS COMMON TO MEMBERS OF
  PROFESSION
• DUTY FOR GOOD FAITH, NOT INFALLIBILITY
• LACK OF PRIVILEDGED COMMUNICATION

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• NEGLIGENCE AND FRAUD
• ORDINARY FRAUD
• FAILURE TO EXERCISE REASONABLE CARE
• GROSS NEGLIGENCE
• FAILURE TO EXERCISE EVEN SLIGHT CARE
• CONSTRUCTIVE FRAUD
• RECKLESSNESS WITHOUT INTENTION
• FRAUD
• MISSTATEMENT IS MADE WITH INTENT
• CONTRACT LAW
• BREACH ON CONTRACT
• THIRD-PARTY BENEFICIARY

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• COMMON LAW
• LAW DEVELOPED THROUGH COURT DECISIONS (PRECIDENT
  CASES)
• VARIES FROM STATE TO STATE
• STATUTORY LAW
• LAWS PASSED BY GOVERNMENTAL UNITS
• FEDERAL STATUTES
• 1933 AND 1934 SECURITIES ACTS
• ICC, FTC
• STATE STATUTES
• APPORTIONMENT OF LIABILITY
• JOINT AND SEVERAL
• SEPARATE AND PROPORTIONATE LIABILITY

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LIABILITY TO CLIENTS

• BREACH OF CONTRACT
• TORT ACTION BASED ON NEGLIGENCE
• LEVEL OF CARE REQUIRED
• FAILURE TO MEET GAAS
• DEFENSES
• LACK OF DUTY
• NONNEGLIGENT PERFORMANCE
• CONTRIBUTORY NEGLIGENCE
• LOSS NOT CAUSED BY NEGLIGENCE

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LIABILITY TO THIRD PARTIES

• PRIVITY OF CONTRACT
• ULTRAMARES V TOUCHE (1931) NY
• NAMED IN CONTRACT
• FORESEEN USERS
• RESTATEMENT OF TORTS
• RUSCH FACTORS (1968)
• FORESEEABLE USERS
• ROSENBLUM V ADLER (1984) NJ (REVERSED)

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LIABILITY UNDER FEDERAL SECURITIES LAWS

• SECURITIES ACT OF 1933
• INITIAL PUBLIC OFFERINGS
• ANY INITIAL PURCHASER
• 3RD PARTY RELIANCE NOT NECESSARY
• AUDITOR MUST SHOW NONNEGLIGENCE
• SECURITIES ACT OF 1934
• SECONDARY MARKETS
• GROSS NEGLIGENCE OR FRAUD
• SCIENTER (KNOWLEDGE)
• RICO

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CRIMINAL LIABILITY

• KNOWINGLY BEING INVOLVED IN DECEPTION
• US V SIMON (CONTINENTAL VENDING)
• US V WEINER (EQUITY FUNDING)
• ESM GOVT V A. GRANT

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PROFESSIONS RESPONSE TO LIABILITY

• STANDARD SETTING TO MEET NEEDS
• REQUIREMENTS TO PROTECT AUDITORS
• PEER REVIEW REQUIREMENTS
• OPPOSE LAWSUITS
• EDUCATION OF USERS
• SANCTION MEMBERS
• LOBBY FOR CHANGES

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INDIVIDUAL RESPONSE TO LIABILITY

• HONEST CLIENTS
• HIRE QUALIFIED PERSONNEL AND ADEQUATE TRAINING
• FOLLOW STANDARDS
• MAINTAIN INDEPENDENCE
• UNDERSTAND BUSINESS
• DOCUMENT WORK THROUGHLY
• ENGAGEMENT LETTERS