BUS 4555 - Chapter 20 Practice

Stage 1 of the auditor dispute process

Occurrence of events resulting in losses for users of financial statements - Events such as bankruptcy, financial distress, fraudulent financial reporting, and misappropriation of assets.

Stage 2 of the auditor dispute process

Investigation by plaintiff attorneys before filing suit - Pre-suit investigation activities by plaintiffs and their attorneys to link user losses with allegations of material omissions or misstatements of financial statements.

Stage 3 of the auditor dispute process

Legal process commencing with the filing of the suit - Activities such as filing complaints, discovery, trial preparation, and the trial.

Stage 4 of the auditor dispute process

Final resolution of the dispute - Resolution of the dispute through summary judgment, settlement, or court decision on appeal after a trial.

Proportionate liability

Each defendant is liable for the portion of damages corresponding to their percentage of responsibility.

Joint and several liability

Each defendant is fully liable for all assessed damages, regardless of their contribution to the injury.

Types of actions auditors are liable for under common law

Breach of contract, negligence, gross negligence/constructive fraud, and fraud. Clients prefer tort actions for larger damages.

Elements to prove negligence against an auditor

Duty to conform to a required standard of care, failure to act accordingly, causal connection between negligence and client's damage, and actual loss or damage.

Four standards for auditors' liability for ordinary negligence

Privity, near privity, foreseen persons or classes, and reasonably foreseeable third parties. Complexity arises due to different levels of relationship and reliance.

Impact of Sarbanes-Oxley on Canada

Canada implemented Bill 198 and issued regulations to enhance internal controls and corporate governance, including the use of auditors participating in the CPAB oversight program and regulations over the role of audit committees.

Importance of the Livent case to auditors

Increased scrutiny of auditors' duty of care to detect and expose fraud. Courts established the use of the Anns framework to determine auditors' duty of care owed to the plaintiff. Auditors can be held liable for negligence in any service they accept.

Key outcome of Transamerica v Dunwoody & Co.

Auditors are expected to uphold ethical requirements and maintain client confidentiality. This is significant to auditors as auditors need consent to disclose requested information, with limited justifiable circumstances for breaking confidentiality.

Four stages of the Auditor Dispute Process

1. The occurrence of events that result in losses for users of the financial statements.

2. The investigation by plaintiff attorneys before filing suit to link the user losses with allegations of material omissions or misstatements of financial statements.

3. The legal process which commences the filing of the suit

4. the final resolution of the dispute.