审计学（英文）_05 Legal Liabillity

Lega∠ abilit It Takes the net profit from Many audits to offset the Cost of one lawsuit Arens Loebbecke Anding &E

Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, 5 It Takes the Net Profit From Many Audits to Offset the Cost of One Lawsuit

CHANGED LEGAL ENVROMMENT Understand the litigious environment in which CPAs practice Audit professionals have a responsibility under common law to fulfill implied or expressed contracts with clients. They are liable to their clients for negligence and/or breach of contract should they fail to provide the services or not exercise due care in their performance. L灬 boecker Andina&E

Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, Understand the litigious environment in which CPAs practice. CHANGED LEGAL ENVIRONMENT Audit professionals have a responsibility under common law to fulfill implied or expressed contracts with clients. They are liable to their clients for negligence and/or breach of contract should they fail to provide the services or not exercise due care in their performance

DISTINCTION AMONG BUSINESS FAILURE AUDIT FAILURE Explain why the failure of financial statement users to differentiate among business failure. aud it failure. and AUDIT RISK audit risk has resulted in lawsuits Business failure occurs when a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions Audit failure occurs when the auditorissues an erroneous audit opinion as the result of an underlying failure to comply with the requirements of generally accepted auditing standards gaas). Audit risk- represents the risk that the auditor will conclude that the financialstatements are fairly stated and an unqualified opinion can be issued when, in fact, they are materially misstated. EVEN THOUGHIT WAS A WELL-CONDUCTED GAAS AUDIT Irens, Locbbecke: AuditiNg & E

Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, Explain why the failure of financial statement users to differentiate among business failure, audit failure, and audit risk has resulted in lawsuits. DISTINCTION AMONG BUSINESS FAILURE, AUDIT FAILURE, AUDIT RISK Business Failure - occurs when a businessis unable to repay its lenders or meet the expectations of its investors because of economic or business conditions. Audit Failure - occurs when the auditor issues an erroneous audit opinion as the result of an underlying failure to comply with the requirements of generally accepted auditing standards (GAAS). Audit Risk - represents the risk that the auditor will conclude that the financial statements are fairly stated and an unqualified opinion can be issued when, in fact, they are materially misstated. EVEN THOUGH IT WAS A WELL-CONDUCTED GAAS AUDIT!

Business Audit failures Risk △udit Failure

Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, Business Failures Audit Risk Audit Failure

LEGAL CONCEPISAFFECTINGLIABILITY Use the primary legal concepts and Prudent Person Concept(not perfection) the terms concerning accountants liability as a basis for studying legal Liability for the Acts of Others (LLP liability of auditors Lack of Privileged Communication(w/ps) Four Maior Sources of Auditors' Legal liability 1. Client -liability to client under common law 2. Third party -liability to third parties under common law 3. Liability under federal securities laws-SH suit 4. Criminal liability- Intent to deceive L灬 boecker Andina&E

Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, Use the primary legal concepts and the terms concerning accountants’ liability as a basis for studying legal liability of auditors. LEGAL CONCEPTS AFFECTING LIABILITY Prudent Person Concept (not perfection) Liability for the Acts of Others (LLP) Lack of Privileged Communication (w/p’s) Four Major Sources of Auditors’ Legal Liability 1. Client - liability to client under common law 2. Third party - liability to third parties under common law 3. Liability under federal securities laws – SH suit 4. Criminal liability – Intent to deceive

LIABILITY TO CLIENTS The most common source Describe accountants liability to of lawsuits clients and related defenses against CPAs is frol Legal Terms Affecting CPAs Liability clients Terms Related Ordinary Negligence to Negligence Gross negligence Constructive fraud and fraud Fraud Terms Related Breach of Contract to Contract Law( Third-Party Beneficiary Common Law Other erms Statutory Law Joint and Several Liability L灬 boecker Andina&E Separate and Proportionate Liability

Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, Describe accountants’ liability to clients and related defenses. LIABILITY TO CLIENTS Legal Terms Affecting CPAs’ Liability Ordinary Negligence Gross Negligence Constructive Fraud Fraud Terms Related to Negligence and Fraud Terms Related to Contract Law Breach of Contract Third-Party Beneficiary Other Terms Common Law Statutory Law Joint and Several Liability Separate and Proportionate Liability The most common source of lawsuits against CPAs is from clients

Auditors defenses against hhentsufits Lack of duty- means that the CPA claims that there was no implied or expressed contract to perform Nonnegligent performance -in an audit, the CPA firm claims that the audit was performed in accordance with gaas Contributory Negligence- exists when the client's own action prevents the auditor from discovering the cause of the loss. Absence of Causal Connection- to succeed in an action against the auditor. the client must be a ble to show that there is a close causal connection between the auditors breach of the standard of due care and the damages suffered by the client. Loebbecke Au面BE

Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, Lack of Duty - means that the CPA claims that there was no implied or expressed contract to perform. Nonnegligent Performance - in an audit, the CPA firm claims that the audit was performed in accordance with GAAS. Contributory Negligence - exists when the client’s own action prevents the auditor from discovering the cause of the loss. Absence of Causal Connection - to succeed in an action against the auditor, the client must be able to show that there is a close causal connection between the auditor’s breach of the standard of due care and the damages suffered by the client

thisd pa ds under co mmon law LIABILITY TO THIRD PARTIES and related defenses UNDER COMMON LAW ULtramares Doctrine -A case that summarized the Liability to Third parties Foreseen Users- The broadest interpretation of the rights of third-party beneficiaries is to use the concept of foreseeable users ②⑤⑤@ Credit Alliance Was a case in New York in which a lender brought suit against the auditor of one of its borrowers, alleging that it relied on the financial statements of the borrower, who was in default, in granting the loan. TO BE LIABLE. THE AUDITOR MUST KNOW WHO WILL RELY ON HIS REPORT AND WHY Restatement of Torts-foreseen users may be members of a Reasonably limited and identifiable group of users(eg, creditors 练 Loebbecke Au面BE

Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, Describe accountants’ liability to third parties under common law and related defenses. LIABILITY TO THIRD PARTIES UNDER COMMON LAW Ultramares Doctrine - A case that summarized the Liability to Third Parties. Foreseen Users - The broadest interpretation of the rights of third-party beneficiaries is to use the concept of foreseeable users. Credit Alliance - Was a case in New York in which a lender brought suit against the auditor of one of its borrowers, alleging that it relied on the financial statements of the borrower, who was in default, in granting the loan. TO BE LIABLE, THE AUDITOR MUST KNOW WHO WILL RELY ON HIS REPORT AND WHY. Restatement of Torts - foreseen users may be members of a Reasonably limited and identifiable group of users (eg, creditors)

CIVIL LIABILITY UNDER Describe accountants' civil liability THE FEDERAL SECURITIES LAWS under the federal securities laws and related defenses securities Act of 1933 The Securities Act imposes an unusual burden on the auditor. section ll of the 1933 act defines the rights of third parties and auditors. Involves new security issues Securities Exchange Act of 1934- The liability of auditors under this act often centers on the audited financialstatements issued to the public in annual reports or submitted to the sec as a part of annual Form 10-K reports. Fraud=Rule 10b-5 dining & E

Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, Describe accountants’ civil liability under the federal securities laws and related defenses. CIVIL LIABILITY UNDER THE FEDERAL SECURITIES LAWS Securities Act of 1933 The Securities Act imposes an unusual burden on the auditor. Section 11 of the 1933 act defines the rights of third parties and auditors. Involves new security issues - Securities Exchange Act of 1934 - The liability of auditors under this act often centers on the audited financial statements issued to the public in annual reports or submitted to the SEC as a part of annual Form 10-K reports. Fraud=Rule 10b-5

SEC Sanctions The sec has the power in certain circumstances to sanction or suspend practitioners from doing audits for SEC companies. Rule 2(e)of the SECs Rules of Practice state The commission may deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the commission.. (1)not to possess the requisite qualifications to represent others, or(2) to be lacking in character or integrity or to have engaged in unethical or improper professional conduct. L灬 boecker Andina&E

Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, The SEC has the power in certain circumstances to sanction or suspend practitioners from doing audits for SEC companies. Rule 2 (e) of the SEC’s Rules of Practice states. The commission may deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the commission…..(1) not to possess the requisite qualifications to represent others, or (2) to be lacking in character or integrity or to have engaged in unethical or improper professional conduct