THE AUDITORS LEGAL RESPONSIBILITY CHAPTER 4 Juan M Garcia Merced

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THE AUDITORS LEGAL RESPONSIBILITY CHAPTER
4Juan M Garcia Merced
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Legal Environment

• Responsibility to parties other than clients
• Auditing and accounting are more complex
• Deep pocket concept of liability
• Large civil court judgment
• Cpas willing to settle in order to avoid legal
  cost and adverse publicity
• Courts have difficulty understanding and
  interpreting accounting auditing matters

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Legal terminology

• Negligence - absence of reasonable care, failure
  to perform the audit in accordance with GAAS
• Gross negligence - lack of even slight care,
  major failures in GAAS, pega sellos
• Fraud - misstatement, knowledge, intent
• Constructive fraud - recklessness
• Proximate cause - absence of causal connection
• Contributory negligence - both were negligent
• Breach of contract
• Engagement letter, privity
• Third party beneficiaries
• Common vs statutory laws

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Liability to Clients

• Client Suits
• Common law
• Burden of proof
• Material error
• Losses
• Ordinary negligence
• Proximate cause
• Auditors Defenses
• Non negligent performance
• No proximate cause
• Contributory negligence

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Liability to 3rd Parties

• Third party beneficiaries (parties in privity)
• Common law, burden of proof
• Material error, losses
• Ordinary negligence, proximate cause
• 2. Other third parties (not in privity)
• Common law, burden of proof
• Material error, losses
• Gross negligence or fraud, proximate cause

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Liability to 3rd Parties

• Auditors Defenses
• Non negligent / fraud performance
• No proximate cause

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New theory Liability to 3rd Parties

• Other third parties (privity foreseen)
• Common law, burden of proof
• Material error, losses
• Ordinary negligence
• Proximate cause
• Other third parties (unknown)
• Common law, burden of proof
• Material error, losses
• GROSS NEGLIGENCE OR FRAUD

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Federal Securities Law
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Securities Act of 1933

• Only available to original purchasers of
  securities
• Requires a registration statement and a
  prospectuses
• Recovery limited to the price difference
• Investor must demonstrates losses and a material
  error in the financial statements
• Auditor has the burden of proof
• Civil and criminal liability
• Not liable if the auditor acted diligently or he
  /she can prove absence of causal connection
• Liable unless auditor can prove his/her diligence
  or not proximate cause

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Securities Act of 1934

• Available to original investors and to the
  investors in the secondary market
• Requires annually audited financial statements
• Requires quarterly reviewed financial statements
• Antifraud provisions
• Investor must demostrates losses, a material
  error in the financial statements use of f/s
• for decision
• Auditor has the burden of proof
• Civil and criminal liability
• Not liable for diligent, ordinary negligence or
  absence of causal connection

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Other Acts

• Racketeer Influenced Corrupt Practices
  ActLegislation aimed at preventing organized
  crime
• Treble (triple) damages
• Recovery of legal fees
• Requires at least two acts of racketeering
  activity within a 10 year period Foreign Corrupt
  Practices Act
• Illegal to offer a bribe to an official of a
  foreign country for obtaining or retaining
  business
• SEC registrants must maintain reasonably complete
  and accurate records an an adequate system of
  internal control

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Actions to Minimize

• Deal only with clients possessing integnty
• Hire, train and supervise personnel
• Follow standards
• Maintain independence
• Understand the client
• Perform quality audits
• Obtain engagement letters
• Carry insurance
• Seek legal counsel
• Limited liability
• Pray every night

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Questions???????