Accountants Legal and
Ethical Responsibilities
Legal
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Federal Securities Law
Contract
Negligence
Racketeering Influenced an Corrupt
Organizations Act (RICO)
Private Securities Litigation Reform act of
1995 (Fraud Detection and Disclosure)
Sarbanes-Oxley Act of 2002
Securities Act of 1933
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Objective: To provide prospective
investors with accurate, complete, and
detailed information about new
offerings of securities.
Securities Act of 1933
Requires that all new issues of
securities sold in interstate commerce
must be registered with the SEC
before sale, unless exempted.
Registration includes certified financial
statements and prospectus.
Prospectus must also be given to each
new purchaser.
Civil and Criminal Penalties
for Violation
Liability extends to Issuer, under writer,
directors/partners, all signers, and experts
(accountants and attorneys) who prepared
or certified part of registration statement.
CPA liable for false, misleading or omitted
information.
Plaintiff need not prove reliance by plaintiff
Due diligence (reasonable grounds to believe
accuracy) is defense.
Civil and Criminal Penalties
for Violation
a.
Criminal – fine and/or imprisonment.
Fines up to $10,000 and/or imprisonment up
to five years.
b.
Civil – Monetary damages to
investors if there is a failure to register,
registration statement or prospectus
contained materially false, misleading
factual information, or omitted material
factual information.
Contract
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Duty determined by terms of
engagement letter.
Liability extends to intended
beneficiaries known to accountant.
– Lending institutions
Negligence
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A. Duty of professional care
B. Failure to act in accordance with
those duties
C. Proximate cause
D. Loss of damage
Liable to client, known third parties,
and possibly foreseen parties (same
class as known third parties)
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Fraud
Requires knowledge, or grossly
negligent or reckless conduct.
Extends liability to reasonably
foreseeable third parties.
Securities Exchange Act of
1934
Regulates ongoing trading of securities
after issuance.
1. Prohibits Fraud
(Section 10b,Rule 10b-5
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Knowing issuance of financial reports
containing false, misleading information or
omitting material information in a report.
(Plaintiff must prove intent and reliance.)
Racketeer Influenced and Corrupt
Organizations Act (1970)
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Federal Crime to engage in racketeering
activity in the acquisition, maintenance or
conduct of the affairs of a business
enterprise or to conspire to do any
racketeering activities.
Incorporates by reference 26 federal crimes
and 9 state felonies, including: securities
fraud, mail fraud and wire fraud.
Requires two or more offenses.
RICO
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Commission of two or more “predicate
acts” within a 10 year period
Racketeer Influenced and
Corrupt Organizations Act
(1970
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Penalties
Criminal - $25,000 per violation
– Up to twenty years imprisonment
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Civil – Government : Divestiture or
dissolution of business
Private: Treble damages, Attorneys
fees
Private Securities Litigation
Reform act of 1995
Requires audits of financial statement include
standards designed to provide reasonable assurance
of detecting illegal acts that have material effect on
financial statements
Requires notification to audit committee
Notification to corporate board if audit committee
does not act.
Notification to SEC if board does not notify SEC
Duty of Inquiry
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If CPA becomes aware of suspicious
circumstances, he/she has a duty to
inquire
A CPA cannot rely on Management's
representations.
Sarbanes-Oxley Act of
2002
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Creates a five-member public company accounting
oversight board. The Board will have five
financially-literate members, appointed for five-year
terms. Two of the members must be or have been
certified public accountants, and the remaining
three must not be and cannot have been CPAs.
Members of the Board are appointed by the
Securities and Exchange Commission, "after
consultation with" the Chairman of the Federal
Reserve Board and the Secretary of the Treasury.
Section 103: Auditing, Quality
Control, And Independence
Standards And Rules.
The Board shall:
(1) register public accounting firms;
(2) establish, or adopt, by rule, "auditing,
quality control, ethics, independence, and
other standards relating to the preparation
of audit reports for issuers;"
(3) conduct inspections of accounting firms;
(4) conduct investigations and disciplinary
proceedings, and impose appropriate
sanctions
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Standard Setting
The Board would be required to
"cooperate on an on-going basis" with
designated professional groups of
accountants and any advisory groups
convened in connection with standardsetting,
Section 104: Inspections of Registered
Public Accounting Firms
Annual quality reviews (inspections)
must be conducted for firms that audit
more than 100 issues, all others must
be conducted every 3 years. The SEC
and/or the Board may order
a special inspection of any firm at any
time.
Section 201: Services Outside The Scope
Of Practice Of Auditors; Prohibited
Activities.
It shall be "unlawful" for a registered public
accounting firm to provide any non-audit service to
an issuer contemporaneously with the audit,
including:
(1)bookkeeping or other services related to the
accounting records or financial statements of the
audit client;
(2)financial information systems design and
implementation;
(3) appraisal or valuation services, fairness opinions,
or contribution-in-kind reports;
Section 201: Services Outside The Scope
Of Practice Of Auditors; Prohibited
Activities.
(4) actuarial services;
(5) internal audit outsourcing services;
(6) management functions or human
resources;
(7) broker or dealer, investment adviser,
or investment banking services;
Section 201: Services Outside The Scope
Of Practice Of Auditors; Prohibited
Activities.
8) legal services and expert services
unrelated to the audit;
(9) any other service that the Board
determines, by regulation, is
impermissible.
The Board may, on a case-by-case basis, exempt from
these prohibitions any person, issuer, public
accounting firm, or transaction, subject to review by
the Commission.
Section 203: Audit Partner
Rotation.
The lead audit or coordinating partner
and the
reviewing partner must rotate off of the
audit
every 5 years.
Section 302: Corporate
Responsibility For Financial
Reports.
The CEO and CFO of each issuer shall prepare
statement to accompany the audit report to certify the
appropriateness of the financial statements and
disclosures contained in the periodic report, and
that those financial statements and disclosures
fairly
present, in all material respects, the operations and
financial condition of the issuer."
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Section 401(a): Disclosures In Periodic
Reports; Disclosures Required.
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Each financial report that is required to be prepared
in accordance with GAAP shall
reflect all material correcting adjustments . . . that
have been identified by a registered accounting firm
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"Each annual and quarterly financial report . . .
shall disclose all material off-balance sheet
transactions" and "other relationships" with
"unconsolidated entities" that may have a material
current or future effect on the financial condition of
the issuer.
Section 401(a): Disclosures In
Periodic Reports; Disclosures
Required.
The SEC shall issue rules providing
that pro forma financial information
must be presented so as not to
"contain an untrue statement" or omit
to state a material fact necessary in
order to make the pro forma financial
information not misleading.
Title VIII: Corporate and
Criminal Fraud
Accountability Act of 2002.
Felony to "knowingly" destroy or create
documents to "impede, obstruct or
influence“ any existing or contemplated
federal investigation.
Auditors are required to maintain "all
audit or review work papers" for five
years.
Title IX: White Collar Crime
Penalty Enhancements
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Maximum penalty for mail and wire fraud
increased from 5 to 10 years.
SEC may prohibit anyone convicted of
securities fraud from being an officer or
director of any publicly traded company.
Maximum penalties for willful and knowing
violations of this section are a fine of not
more than $5,000,000 and/or imprisonment
of up to 20 years.
Professional
Responsibilities
AICPA Code of Professional Conduct
Principles
 A. CPA should exercise sensitive professional
and moral judgment in all CPA activities.
 B. Demonstrate commitment to
professionalism
 C. Perform responsibilities with integrity to
maintain public confidence.
Professional
Responsibilities
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4. Maintain objectivity and be free of
conflicts of interest.
5. Be independent in fact and in
appearance.
6. Strive to improve competence and
quality of services and discharge
duties to best of his/her ability.
Rules
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A.
Rule 101 – Independence
CPA shall be independent in the
performance of professional services
rendered. (Tax and consulting do not
require independence)
Independence Rule 101
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Impaired by:
– Direct or material indirect financial interest in
client
– Trustee or executor of trust or estate which has
financial interest in client
– Joint of closely-held business investment with
client or officer, director of principal stockholder.
(Fee outstanding for service performed more than
one year prior to audit takes on characteristics of
a loan from accountant to client.)
Competence (Rule 201)
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CPA should not undertake any
engagement that the CPA cannot
reasonably expect to complete with
professional competence.
Confidentiality (Rule 301)
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CPA should not disclose any
confidential information obtained in
the course of an engagement without
consent of the client, unless required
to do so by law, AICPA regulations or
state CPA societies.
Contingent Fees (Rule
302)
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Professional services should not be
rendered under a contingent fee basis.
Prohibited for the filing of an origial or
amended tax return. However,
permitted for representing a client in
an examination of a client’s tax return.
Discreditable Acts (Rule
501
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CPA should not commit an act in
personal or professional life that
discredits the profession