Due Care
Fiduciary duty to the corporation and to shareholders to act in good faith, exercise the care that an ordinarily prudent person would exercise in similar circumstances, and act in a way that s/he considers to be the best interests of the corporation
Duty of Loyalty
Requires directors to act in best interests of the company, faithfulness to one's obligations and duties
Duty of Good Faith
Honesty of purpose; caring for well-being of stakeholders
Business Judgment Rule
Directors and officers are expected to exercise due care and to use their best judgment in guiding corporate management
Auditors can be held liable under two classes of law:
Common Law and Statutory Law
Common law
Evolves from legal opinions issued by judges in deciding a case
Statutory law
Legislation passed at state or federal level that establishes certain courses of conduct that must be adhered to by parties
Privity
Contractual obligation. Can be sued for tort liability, which is ordinary negligence or fraud
Distinguish between common-law liability and statutory liability for auditors. What is the basis for the difference in liability?
Common law liability arises from legal opinions issued by judges in deciding cases. These opinions become legal precedent and guide other judges in deciding on similar cases in the future. Common law cases are civil suits. Statutory liability reflects leg
Ordinary Negligence
Auditor failed to exercise due care of the standard of care that other accountants would have done in similar situations
When privity exists, plaintiffs must demonstrate all of the following:
1. They suffered an econOmic loss
2. Auditors did not perform in accordance with the terms of the contract, thereby breaching it
3. Auditors failed to exercise the appropriate level of professional care related to tort actions
4. The breach of contract or
Examples of Statutory Liabilities
Securities Act of 1933, Securities Act of 1934, Sarbanes Oxley Act of 2002
Securities Act of 1933
Regulates the disclosure of information in a registration statement for a new public offering of securities. Companies must file registration statements (S-1, S-2, and S-3 forms) and prospectuses which contain financial statements that have been audited b
Securities Act of 1934
Regulates the ongoing reporting by companies whose securities are listed and traded on a stock exchange. Requires ongoing filing: reviewed quarterly filing, audited annual reports, other information to keep the registration current
Distinguish between the legal concepts of actually foreseen third-party users and reasonably foreseeable third-party users. How does each concept establish a basis for an auditor's legal liability to third parties?
Actually foreseen third party users are a limited range of individuals or organizations that the client intends the information to benefit. The auditor need not know the exact identity of the third party. However, it owes a duty to persons who the profess
Defenses Available from SEC 1933
Materiality Defense: false/misleading information is not material and shouldn't be part of the purchaser's decision making process
Due Diligence Defense: Defendant must prove that a reasonable investigation of the financial statement of the issuer and con
Defenses from SEC 1934
Reliance by plaintiff: reliance cannot be established if the damages or loss suffered by the plaintiff would have occurred regardless of whether the financial statements were misstated
Intent to Deceive or Defraud: auditor liability is lined to the intent
Illegal Insider Trading:
When owner bases trade of stocks on information the public does not know and gives a tip of information to someone else so that he could trade his stock
Reporting requirements
1) Assess materiality, 2) Determine if illegal, and 3) Inform appropriate level of management, then audit committee or Board of Directors, and then Securities and Exchange Commission
SOX 302
Certification by CEO and CFO that financial reports do NOT contain untrue material fact or omission of such
Foreign Corrupt Policies Act
Establishes standards of acceptability of payments (bribes) made by U. S. multinationals to foreign government officials
Private Securities Litigation Reform Act
Audit procedures designed to provide "reasonable assurance" of detecting illegal acts. Reporting requirements
Proportionate Liability
A party is liable only for that proportion of damages for which he is responsible
Facilitating payments
Payments made to induce official to carry our normal responsibilities
Restatement (Second) of Torts
Expands an accountants' legal liability for negligence to any third parties (foreseen third party) identified as intended recipients of the work
Rosenblum Case
Ruled that auditors can be liable for ordinary negligence to all reasonably foreseeable third parties who rely on the financial statements