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Hebeler auditor's legal liability

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Overview of External Auditors' Legal Liability Issue with Contract Law, Tort Law, State and Federal Criminal Law. Common issues and examples , over view powerpoint for class TCO#D

Overview of External Auditors' Legal Liability Issue with Contract Law, Tort Law, State and Federal Criminal Law. Common issues and examples , over view powerpoint for class TCO#D

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Hebeler auditor's legal liability Presentation Transcript

  • 1. EXTERNAL AUDITING 555EXTERNAL AUDITING 555 TCO # DTCO # D LITIGIOUS ENVIRONMENTLITIGIOUS ENVIRONMENT ISSUES, LAWS, LEGAL SITUATIONS.ISSUES, LAWS, LEGAL SITUATIONS.
  • 2. Business Failure, Audit Failure,Business Failure, Audit Failure, and Audit Riskand Audit Risk Business failureBusiness failure It occurs when a business is unable toIt occurs when a business is unable to repay its lenders or meet therepay its lenders or meet the expectations of its investors becauseexpectations of its investors because of economic or business conditions.of economic or business conditions.
  • 3. Business Failure, Audit Failure,Business Failure, Audit Failure, and Audit Riskand Audit Risk Audit failureAudit failure It occurs when the auditor issues anIt occurs when the auditor issues an erroneous audit opinion as the resulterroneous audit opinion as the result of an underlying failure to complyof an underlying failure to comply with the requirements of generallywith the requirements of generally accepted auditing standards (GAAS).accepted auditing standards (GAAS).
  • 4. Business Failure, Audit Failure,Business Failure, Audit Failure, and Audit Riskand Audit Risk Audit riskAudit risk It represents the risk that the auditor willIt represents the risk that the auditor will conclude that the financial statementsconclude that the financial statements are fairly stated and an unqualifiedare fairly stated and an unqualified opinion can be issued when, in fact,opinion can be issued when, in fact, they are materially misstated.they are materially misstated.
  • 5. Business Failure, Audit Failure,Business Failure, Audit Failure, and Audit Riskand Audit Risk BusinessBusiness failurefailure AuditAudit failurefailure AuditAudit riskrisk
  • 6. Four Major Sources of Auditors’Four Major Sources of Auditors’ Legal LiabilityLegal Liability Third partyThird party FederalFederal securities lawssecurities laws ClientClient CriminalCriminal liabilityliability
  • 7. Liability From ClientsLiability From Clients The most common source of lawsuitsThe most common source of lawsuits against CPAs is from clientsagainst CPAs is from clients..
  • 8. Liability to Clients:Liability to Clients: Under contract law - for breach of contractUnder contract law - for breach of contract Under tort law** for:Under tort law** for: Ordinary negligenceOrdinary negligence – failure to exercise care– failure to exercise care aa reasonable person would under the samereasonable person would under the same circumstancescircumstances Gross negligenceGross negligence – failure to use even slight– failure to use even slight care in circumstancescare in circumstances FraudFraud -- intentional deceptionintentional deception ** Tort = wrongful act that injures another person’s property, body, or** Tort = wrongful act that injures another person’s property, body, or reputation.reputation. Liability Under the Common LawLiability Under the Common Law
  • 9. Auditor’s Defenses AgainstAuditor’s Defenses Against Client SuitsClient Suits Lack of duty to performLack of duty to perform Nonnegligent performanceNonnegligent performance Contributory negligenceContributory negligence Absence of causal connectionAbsence of causal connection
  • 10. Liability Third Parties Under theLiability Third Parties Under the Common LawCommon Law Ultramares:Ultramares: upheld the privity of contractupheld the privity of contract doctrine: third parties cannot sue auditors fordoctrine: third parties cannot sue auditors for ordinary negligence.ordinary negligence. Foreseen users – A limited group of persons forForeseen users – A limited group of persons for whom the auditor is aware will rely on thewhom the auditor is aware will rely on the financial statements.financial statements.
  • 11. Securities Exchange Act of 1934Securities Exchange Act of 1934 1934 Act – requires ongoing filing of quarterly and annual reports, and other information to keep the registration statement current. Certain information, including financial statements must be audited. The liability of auditors under this act oftenThe liability of auditors under this act often centers on Rule 10b-5, p. 118.centers on Rule 10b-5, p. 118. • It may apply to accountants if they intentionallyIt may apply to accountants if they intentionally or recklessly misrepresent information intended foror recklessly misrepresent information intended for 33rdrd party use.party use.
  • 12. Auditor Defenses – 1934 ActAuditor Defenses – 1934 Act Nonnegligent performanceNonnegligent performance Lack of dutyLack of duty Absence of causal connectionAbsence of causal connection
  • 13. Criminal LiabilityCriminal Liability CPAs can be found guilty for criminalCPAs can be found guilty for criminal action under both federal and state laws.action under both federal and state laws. • Most laws make it a criminal offense toMost laws make it a criminal offense to defraud another person throughdefraud another person through knowinglyknowingly being involved with falsifications in financialbeing involved with falsifications in financial statements.statements. The Sarbanes-Oxley Act makes it a felonyThe Sarbanes-Oxley Act makes it a felony to destroy or create documents to impedeto destroy or create documents to impede Or obstruct a federal investigation.Or obstruct a federal investigation.
  • 14. Protecting Individual CPAsProtecting Individual CPAs from Legal Liabilityfrom Legal Liability Deal only with clients possessing integrityDeal only with clients possessing integrity Hire qualified personnelHire qualified personnel Follow the standards of the professionFollow the standards of the profession Maintain independenceMaintain independence
  • 15. Protecting Individual CPAsProtecting Individual CPAs from Legal Liabilityfrom Legal Liability Understand the client’s businessUnderstand the client’s business Perform quality auditsPerform quality audits Document the work properlyDocument the work properly Obtain an engagement and a representation letterObtain an engagement and a representation letter Maintain confidential relationsMaintain confidential relations