Bài giảng Business Law - Chapter 46: Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin10History and Nature of CorporationsOrganization and Financial Structure of CorporationsManagement of CorporationsShareholders’ Rights and LiabilitiesSecurities RegulationLegal and Professional Responsibilities of Auditors, Consultants, and Securities ProfessionalsCorporationsPARTLegal and Professional Responsibilities of Auditors, Consultants, and Securities ProfessionalsPAETRHC46Madness in great ones must not unwatched go.William Shakespeare, Hamlet, Act. 3, Scene 146-*Learning ObjectivesUnderstand the duties that securities professionals and accountants owe to their clients and third partiesLearn to behave in a manner that prevents you and your firm from incurring liability to clients and third partiesAuditors, consultants, and securities professionals owe a general duty to their clients and other persons affected by their actions to exercise the skill and care of the ordinarily prudent professional in the same circumstancesProfessional’s duty to exercise reasonable care is a subset of negligence standardTwo elements compose the general duty of performance: skill and careOverviewProfessionals are not guarantors of the accuracy of their work or that advice they give to clients will work out well However, when clients sue professionals, there are three principal bases of liability: contract, tort, and trustProfessionals’ Liability to ClientsA professional contracts with a client to perform as agreed with the implied duty to perform as the ordinarily prudent person in the profession would performIf the professional fails to perform as agreed, s/he may be liable for compensatory damages and consequential damagesContractual LiabilityA professional is negligent if s/he breaches the duty to act skillfully and carefully and proximately causes damages to the clientThe suitability and know-your-customer rules of the NASD and stock exchanges require a securities broker to know the financial circumstances and investment objectives of the client before recommending securities or executing securities transactionsTort Liability & NegligenceCourts generally prevent a professional from escaping liability merely because client also acted negligently (contributory negligence)Professional is expected to have skills superior to a client’s skillsSome courts allow contributory or comparative negligence defensesSee Scioto Memorial Hospital Ass’n., Inc. v. Price WaterhouseContributory & Comparative NegligenceA professional may be liable to a client for fraud if s/he misstates or omits facts in client communications and acts with scienterScienter: knowledge of the falsity of a statement or a reckless disregard for truthMost courts extend a professional’s liability for fraud to all foreseeable users of the professional’s work productTort Liability for FraudIn the 1931 Ultramares case, Judge Cardozo required privity of contract (primary benefit) to hold a professional liable for negligenceState courts now adopt one of three tests to determine whether a nonclient may sue a professional for negligence:Primary Benefit TestForeseeable Users TestForeseen Users and Foreseen Class of Users TestThird Parties & LiabilitySection 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 statementAn underwriter is liable for errors in the entire registration statementAs an expert, an auditor is liable only for that part of a registration statement for which the auditor has issued an opinion about the financial statementsSection 11 & ProfessionalsSection 12(a)(2) of the Securities Act of 1933 imposes liability on anyone who misstates or omits a material fact in connection with an offer or sale of a security that is part of a general distribution of securities by an issuerDirect contact with buyer is required, thus merely performing professional services is not enoughSection 12(a)(2) & ProfessionalsSection 18 of the 1934 Securities Exchange Act imposes liability on persons who furnish misleading and false statements of material fact in any report or document filed with the SEC under the 1934 Act, such as annual 10-K report, monthly 8-K report, and proxy statementsPurchaser or seller of a security must prove reliance on the defective documentSection 18 & ProfessionalsThe Act imposes significant public duties on independent auditors that audit financial statements of public companiesHowever, the Act limits the liability of most professionals to the amount of an investor’s loss for which the defendant is responsiblePrivate Securities Litigation Reform Act of 1995Section 404 requires public issuers to include in their annual reports an “internal control report” acknowledging management responsibility to maintain “an adequate internal control structure and procedures for financial reports”www.aicpa.org/sarbanes/index.asp Auditors must attest to management’s assessment of internal controlsSarbanes-Oxley ActAuthorizes SEC to issue point-of-sale disclosure rules when investors purchase investment products or services (e.g., mutual funds and investment management services)Authorizes the SEC to impose a fiduciary duty on broker-dealers and investment advisers in their dealings with their customerDodd–Frank Wall Street Reform and Consumer Protection Act1933 Act imposes criminal liability for willful violations of any section, such as Sections 11, 12(a)(2), and 17(a), or any 1933 Act rule or regulation1934 Act imposes criminal penalties for willful violations of any section, such as Sections 10(b) and 18, and any 1934 Act rule or regulation (e.g., Rule 10b–5)Professionals & Criminal LiabilityA 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 PapersThe Arthur Andersen case highlights the 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 7 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 RetentionThought QuestionsJoseph Berardino, former Arthur Andersen CEO, testified in an Enron hearing (Dec. 12, 2002): We made a professional judgment about the appropriate accounting treatment that turned out to be wrong. What is your opinion of the Enron and Andersen cases during the past decade?