BUS 4555 - Chapter 20 Practice
20-1: Briefly describe the four stages of the auditor dispute process.
- 1. The occurrence of events that result in losses for users of the financial statements.
o The first stage includes the events that resulted in the losses.
o For example: bankruptcy, financial distress, fraudulent financial reporting, and misappropriation of assets.
- 2. The investigation by plaintiff attorneys before filing suit to link the user losses with allegations of material omissions or misstatements of financial statements.
o Pre-suit investigation, may involve investigation activities by plaintiffs and their attorney’s before initiating legal proceedings.
- 3. The legal process which commences with the filing of the suit.
o Involves activities such as filing of complaints, discovery, trail preparation and the trial.
- 4. The final resolution of the dispute.
o Involves the resolution of the dispute, which may include a summary judgement, a settlement to avoid or discontinue litigation, or a court decision on appeal after a trial.
o
20-2: What is meant by proportionate liability? Contrast this legal doctorine with the doctorine with the doctorine of joint and several liability.
- Proportionate liability is where each defendant is liable solely for the portion of damages that correspond to the percentage of responsibility of that defendant.
- Under the doctorine of joint and several liability, each defendant is held fully liable for all assessed damages, regardless of the extent to which they contributed to the injury.
20-3: For what types of actions are auditors liable to a client under common law? Why would the client prefer to sue the auditor for a tort action rather than for a breach of contract?
- Under common law, an auditor can be held liable to clients for breach of contract, negligence, gross negligence/constructive fraud, and fraud. A client would prefer to sue an auditor for a tort action because larger amounts for damages can be assessed than for a breach of contract.
20-4: What elements must a client prove to maintain an action against an auditor for negligence?
- The duty to conform to a required standard of care.
- Failure to act in accordance with that duty.
- A causal connection between the auditors negligence and the clients damage.
- Actual loss or damage to the client.
20-5: Distinguish among the four standards that have evolved for defining auditors’ liability for ordinary negligence to third parties under common law. Why is this area of auditor’s liability so complex?
- Privity
o Obligations that exist under a contact are between the original parties to the contract, and failure to perform with due care results in breach of that duty only to those parties.
- Near Privity
o Does not require strict privity of contract, but that the third party be known to the auditor and that the auditor has directly conveyed the audit report or acted to induce reliance on the audit report.
- Foreseen Persons or Classes
- Reasonably Foreseeable Third Parties
20-6: Discuss the impact of Sarbanes-Oxley on Canada.
- Canada had their share of accounting and audit scandals creating a need for a more robust oversight over internal controls within an organization. When the United States implemented SOX audits, the initial reaction, particularly with the OSC, was to do the same. Capital market participants looked to the Canadian securities regulators to provide a response. The Canadian government passed Bill 198 after which the Canadian securities commission issued three regulations to support corporate governance. These include Multilateral Instrument (MI) 52-108 requiring security issuers to use auditors who participate in the CPAB oversight program; MI 52-109 requiring CEO’s and CFO’s to verify filings and MI 52-110 requiring regulation over the role of audit committees.
20-7: What is the important of the Livent case to auditors?
- The Livent scandal increased the scrutiny of auditors. Livent claimed that it was due to a breach in the duty of care of the auditors to detect and expose fraud that led to the decline in their financial health. As a result of this case, the courts established the use of the Anns framework to determine if the auditors owed a duty of care to the plaintiff. Additionally the decision in Livent indicates that auditors can be held liable for negligence in any service they accept.
20-8: What was they key outcome of the Transamerica Commercial Finance Corp. Canda v Dunwoody & Co. et al. case? Why is this significant to auditors?
- The importance of the Transamerica v. Dunwoody case was it established that auditors are expected to uphold their ethical requirements and maintain confidentiality of client information. This is significant to auditors because they have to obtain consent to disclose any information requested. There are specific circumstances in which breaking the principle of confidentiality may be justified, however they are limited.