Legal Liability

1

• Legal Liability

2
Civil Liability

• Need to prove
• Liability? (auditor at fault)
• Causation? (failure of audit caused damage)
• Damages? (amount of loss)
• Another issue Privity
• Have the right to sue?
• Another issue Burden of Proof
• Plaintiff or Defendant?

3
Civil Liability -- Different Criteria

• Liability to clients (privity)
• Liability to third parties under common law
• Liability to third parties under statutory law

4
Liability to Clients - Concepts

• Due care
• Comparative negligence defense
• Confidential relationship

5
Common Law - Liability to Third Parties Level
of Auditors Fault

• Fraud
• intentional misstatement or concealment of a
  material fact
• Gross negligence
• flagrant or reckless departure from the standard
  of due care, or willful and wanton misconduct
• Ordinary negligence
• an unintentional act, a thoughtless slip or
  blunder

6
Common Law - Liability to Third
PartiesApproaches

• Primary beneficiaries and near-client equivalents
• Foreseen or intended beneficiaries
• Foreseeable beneficiaries

7
Statutory Law -Liability to Third Parties

• Securities Act (1933) - Initial Offerings to the
  Public
• Burden of Proof Defendant
• Exchange Act (1934) - Ongoing Reporting
• Burden of Proof Plaintiff

8
Exchange Act - Rule 10b-5

• Need to prove that --
• Auditor made one or more false representation(s)
• Plaintiff relied on Auditors representations
• Auditor knew or should have known representations
  were false
• Damages were caused by Auditors representations

9
Criminal Liability
10
Noted Legal Cases

• Bar Chris
• Yale Express
• Continental Vending
• U.S. Financial
• National Student Marketing
• 1136 Tenants Corporation
• Equity Funding
• Fund of Funds
• Credit Alliance Corporation
• Mann Judd Landau
• ESM
• Bily
• Crazy Eddie

11
Protection Against Liability

• Liability insurance
• Quality control
• Tort reform

12
Forensic Accounting