Bài giảng Business Law (13th edition) - Chapter 46: Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals

CorporationsHistory & Nature of CorporationsOrganizational and Financial Structure of CorporationsManagement of Corporations10McGraw-Hill/Irwin Business Law, 13/e© 2007 The McGraw-Hill Companies, Inc. All rights reserved.CorporationsShareholders’ Rights & LiabilitiesSecurities RegulationLegal & Professional Responsibilities of Auditors, Consultants, and Securities Professionals10McGraw-Hill/Irwin Business Law, 13/e© 2007 The McGraw-Hill Companies, Inc. All rights reserved.Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals PAETRHC46“Madness in great ones must not unwatched go.”William Shakespeare, Hamlet, Act. 3, Scene 1Learning ObjectivesGeneral standard of performanceProfessional liability to clientsProfessionals’ liability to third personsConflicts of interestLimiting professionals’ liabilityAudit requirementsProfessional-client privilege46 - *Securities professionals, auditors, and consultants owe their clients a general duty of performance: skill and careProfessional must have skill of ordinarily prudent person in her professionProfessional must act as carefully as would the ordinarily prudent person in her professionElements of the General Duty46 - *Professional contracts with client to perform as agreed with implied duty of skill and careProfessional may not delegate duty without client’s consentIf professional fails to perform as agreed, s/he may be liable for compensatory damages and consequential damagesProfessional not liable for breach of contract if client obstructs performance Contractual Liability46 - *Professional is negligent if s/he breaches duty to act skillfully and carefully and proximately causes damages to the clientNo specific duty for accountant to uncover employee fraud or embezzlementAn accountant is negligent if s/he fails to uncover employee fraud or embezzlement when ordinarily prudent accountant would have discovered itTort Liability46 - *Courts generally prevent a professional from escaping liability merely because client also acted negligently (contributory negligence)Professional may be liable to client for fraud if s/he misstates or omits facts in client communications and acts with scienterScienter: knowledge of the falsity of statement or reckless disregard for truthTort Liability46 - *Professionals owe a duty of trust to clientsInformation and assets entrusted by client to professional may be used only to benefit client; information must remain confidentialSarbanes–Oxley Act banned most services by audit firms for audit clients to avoid conflict-of-interest claims and SEC requires analyst research reports to include certification of accuracy and compensationBreach of Trust46 - *Other persons besides a professional’s clients may use a professional’s work productIf a professional prepares documents that prove to be incorrect, nonclients who relied on the documents may suffer damagesNonclients may sue professionals for common law negligence, common law fraud, and violations of the securities lawsThird Parties & Liability46 - *Section 11 of the Securities Act of 1933 states that an auditor or underwriter may be liable to a purchaser of securities issued pursuant to a defective registration statementAuditors and underwriters may raise a due diligence defense by proving s/he made a reasonable investigation and had reasonable belief no misstatements or omissions of material fact occurred Section 11 & Professionals46 - *Section 12(a)(2) of 1933 Act imposes liability on anyone who misstates or omits a material fact in connection with security offer or sale that is part of a general distribution of securities by an issuerUnder Section 17(a) of 1933 Act, accounting or securities professional may incur liability only if purchaser of security proves reliance on misstatement or omission of material factSections 12(a)(2) & 17(a)46 - *Section 18 of 1934 Act imposes liability on persons who furnish misleading and false statements of material fact in any report or document filed with the SECRule 10b–5 prohibits anyone from making a misstatement or omission of material fact in connection with securities purchase or saleSection 18 & Rule 10b-546 - *Private Securities Litigation Reform Act of 1995 Act imposes significant public duties on independent auditors that audit the financial statements of public companiesSarbanes-Oxley, Section 404 requires public issuers to include in annual reports an “internal control report” acknowledging management responsibility to maintain “adequate internal control structure and procedures for financial reports”Other Legislation46 - *A professional’s opinion letter generally expresses an unqualified opinion (e.g., compliance with GAAS and GAAP), but sometimes professional will issue a qualified opinion, disclaimer of opinion, or an adverse opinionThe Opinion Letter46 - *1933 Act imposes criminal liability for willful violations of any section, rule or regulation1934 Act imposes criminal penalties for willful violations of any section, rule or regulationProfessionals face discipline, including suspension of a professional license, by federal and state agencies if they engage in illegal or unethical conductProfessionals & Criminal Liability46 - *A client’s personal records, such as accounting records, are the property of the client and the professional must return the records at end of jobMaterial created by a professional, such as working papers produced by independent auditors, belong to the professionalClient has a right of access to working papersOwnership of Working Papers46 - *Arthur Andersen LLP case highlights rules about document retentionAll professional firms have rules about document retention and destructionFederal law requires all audit or review working papers to be retained for seven years No requirement to retain documents that prove professional’s or client’s guilt, as long as they do not destroy documents (i.e., evidence) with the intent to obstruct a criminal prosecutionDocument Retention46 - *Many states have enacted an accountant- client privilege of confidentiality that protects communications between a client and an accountant as well as accountants’ working papersThe privilege belongs to the clientFederal courts do not recognize the privilege in matters involving federal questions, including antitrust and criminal mattersProfessional-Client Privilege46 - *Test Your KnowledgeTrue=A, False = BTwo elements compose the general duty of performance: skill and quality of results.A professional must act as carefully as the ordinarily prudent person in her profession.Organizing a professional business as a corporation will protect professionals from personal liability for professional misconduct.Professionals are guarantors of the accuracy of their work.46 - *Test Your KnowledgeTrue=A, False = BAudit firms may develop the financial information system design for the client and also audit the firm’s systems. An accountant’s opinion letter for an audit always expresses a qualified opinion.Working papers produced by independent auditors belong to the client at the end of the job.46 - *Test Your KnowledgeMultiple ChoiceWhich of the following events would make a professional liable to the client: (a) If the professional fails to perform as agreed in the contract(b) If the professional, acting with scienter, misstates facts in client communications(c) If the professional shows client information to another client without first client’s consent(d) All of the above 46 - *Test Your KnowledgeMultiple ChoiceWhich of the following is not true about the Private Securities Litigation Reform Act? (a) It applies to underwriters only(b) It limits the liability of most professionals to the amount of an investor’s loss for which defendant is responsible(c) It imposes significant public duties on independent auditors auditing public companies46 - *Thought QuestionsJoseph Berardino testified in an Enron hearing (Dec. 12, 2002) that, “We made a professional judgment about the appropriate accounting treatment that turned out to be wrong.” What is your opinion of the Enron and Anderson cases?46 - *