B4555 - Chapter 20

Breach of contract

When a client or auditor fails to meet the terms and obligations established in a contract, which are normally finalized in the engagement letter.

Third parties may have privity or near-privity of contract

Refers to the fact that a contract or specific agreement exists only between the parties directly involved.

Civil law

All law that does not relate to criminal matters.

Class action

A lawsuit filed by one or more individuals on behalf of all persons who may have invested on the basis of the same false and misleading information.

Criminal law

Statutory law that defines the duties citizens owe to society and prescribes penalties for violations.

Fraud

Actions taken with the knowledge and intent to deceive.

Gross negligence (aka

An extreme, flagrant, or reckless departure from professional standards of due care.

Ordinary negligence

An absence of reasonable or due care in the conduct of an engagement. Due care is evaluated in terms of what other professional accountants would have done under similar circumstances.

Privity

The fact that a contract or specific agreement exists only between the parties directly involved. Absent a contractual or fiduciary relationship, the accountant does not owe a duty of care to be injured partly.

Scienter

Acting with intent to deceive, defraud, or with knowledge of a false representation.

Tort

A wrongful act, other than a breach of contract, for which civil action may be taken.

Breach of contract liability

Based on the auditor's failing to complete the services agreed to in the contact with the client.

Negligence

If an engagement is performed without due care, the CPA may be held liable for an actionable tort in negligence. Does not require due care.

Client must prove in common law negligence - Client

(1) A duty was owed to the client, (2) Failure to act in accordance with that duty, (3) A causal connection between the auditor's negligence and the client's damage, (4) Actual loss or damage to the client.

Fraud

If an auditor has acted with knowledge and intent to deceive a third party. Some courts have interpreted gross negligence as an instance of fraud.

Third party must prove in fraud

(1) A false representation by the CPA, (2) Knowledge or belief by the CPA that the representation was false, (3) The CPA intended to induce the third party to rely on the false representation, (4) The third party relied on the false representation, (5) The third party suffered damages.

Securities Act of 1933

Regulates the disclosure of information in a registration statement for a new public offering of securities. Section 11 imposes liability on issuers and others, including auditors, for losses suffered by third parties when false or misleading information is included in a registration statement.

Securities Exchange Act of 1934

Concerned with ongoing reporting by companies whose securities are listed and traded on a stock exchange. Section 18 imposes liability on any person who makes a materially false or misleading statement in documents filed with the SEC. Section 10(b) and Rule 10b-5 are the greatest source of liability for auditors under this act.

Sarbanes-Oxley Act of 2002

Created the PCAOB, introduced stricter independence rules, audits of internal controls, increased reporting responsibilities. Most sweeping securities law since 1934.

Canadian Business Corporations Act "CBCA"

Liability structure defined to be a modified proportionate liability with respect to certain financial information of a CBCA corporation. If an auditor is found responsible for financial loss, their damages are limited to their degree of responsibility for the loss.

Foreign Corrupt Practices Act (FCPA)

Passed in 1977 to mitigate corruption and bribery. An auditor may be subject to administrative proceedings, civil liability, and civil penalties.

Criminal Liability

Auditors can be held criminally liable under the laws discussed in the previous section. Criminal prosecutions require that some form of criminal intent be present, but gross negligence can also be deemed criminal.