Matakuliah
Tahun
: Manajemen Kinerja Sistem Komputer
: Feb - 2010
12. Legal and Ethical
Responsibilities
in Public Reporting
Pertemuan 23 - 24
12. Legal and Ethical Responsibilities in Public
Reporting
01. Bad Outcomes, bad Decisions, or Bad
Audits?
02. Responsibilities of Management and
Directors
Risk Mitigation by Management and
Directors
• Management and directors can limit litigation loss
exposure from suits by stockholders and third-party
users of financial and other information by using the
approach outlined in Chapter 3.
• They can avoid risk at the source, transfer or share risk,
and limit its potential effect by risk mitigation
procedures.
Internal Auditors
• In some corporations, the internal auditor is
assigned to report to the CEO, and some have
direct access to audit committee.
• An Internal auditor who discovers significant
misdeeds by top management is in a difficult
position.
Directors and Officers Insurance
• Directors and officers face the risk of lawsuits from
stockholders who claim that they have not performed
their duties regarding stockholders' interest.
• Because of these personal risks, many corporations
purchase insurance to indemnify directors and officers
from loss.
03. Responsibilities of Auditors
Common-Law Liability
• Investigation Contract
– Assume that Mamie, the owner/manager of mamie's Pie frontier, hires
an auditor to audit (investigate) her own financial statement as a
means of evaluating her information system and controls.
– Before hiring the auditor, Mamie and the auditor discuss the possible
gains from "discovery" of GAAP-based earnings misstatements of a
given magnitude against the cost of conducting the auditor's
investigation and the risk of misstatement of that magnitude or more.
• Figure 12.1
– User's and Auditor's Expected Costs under Negligence Rule Liability :
User's Expected Costs.
• Figure 12.1 Continued
– User's and Auditor's Expected Costs under Negligence Rule Liability :
Auditor's Expected Costs.
Certification Contract
•
•
A certifying auditor typically contracts with a client firm to conduct an audit
following GAAS to express an opinion on the client's asertions that financial
statements may be used by third parties.
Under common law, some third parties are said to be " third party
beneficiaries" of the audit contract.
Tort Law
•
Tort Law has developed over time and allows non-contracting parties
damaged by defective audited statements to sue the auditor for gross
negligence, or fraud.
Statutory Law -- securities Acts Liability
• Under 1934 act, the auditor's liability is similar to that
under the common law.
• The private securities litigation reform act of 1995
changed the auditor's liability and the liability of
management in important ways.
Audit Litigation Costs
• Allegation of auditor malpractice lead to
substantial legal costs for both the plaintiff and
the defendant.
• The litigation process can be difficult, time
consuming, highly uncertain as to outcome, and
expensive
Figure 12.2 Example of "Bespeaks Caution" Language in Management Discussion and
Analysis on form 10-K.
External Auditors' Response to Litigation
• The large CPA firms reacted in a numbers of ways.
• First, as individual firms, they began avoiding risk at the source (as in
chapter 3) by applying the engagement risk model of chapter 7.
• Second, auditors litigated risks by altering auditing procedures to focus on
the strategic viability of their clients, which reduced the client business risk
of future declining profit, as well as going concern problems.
• Third, auditors explored other ways of limiting risk through the audit contract
(engagement letter).
04. Empirical Result in Litigation
Auditors as a source of Indemnification
• Can auditors be viewed as a viable source from which
investment losses can be recovered ?
• To examine this question, researchers have evaluated
lawsuits against the largest CPA firms for a period of
more than 30 years.
Litigation against management and
Directors
• In addition to securities against auditors, management
also faces legal liability for false and misleading claims
made in the financial reporting process.
• As shown in figure 12.3, some AAER‘ s result in no
litigation against either management, directors, or the
auditor of companies cited, while others result in litigation
against the auditor as well as management or directors,
and still other litigation results in action against
management or directors, but not against the auditor.
05. Codes of Professional Conduct
•
Figure 12.4 shows AICPA Code of Professional Conduct Rules.
Competence
•
Rule 201 requires that the CPA comply with general standards of
professional competence, due professional care, planning and supervision,
and sufficient relevant data for an engagement whether it is for attestation,
tax, or consulting services. (see also rule 202, 203 and 301).
Trustworthiness
•
CPC Rules 101, 102, 302, and 503 relate to independence and the
perception of independence by users.
Other Conduct Rules and History
• The AICPA Code of Professional Conducts has
changed substantially over time.
Alternatives and Issues in Independence
• There are several open issues regarding auditor
independence.
• As noted above, one issue is whether independence
and the objectives to be achieved should be defined.
• Here are three independence issues of interest to top
management :
– Should an outside auditor who quits the audit firm be allowed to
go to work for his or her audit clients ?
– Should outside auditors be allowed to be the internal auditor or
supply accounting service to their audit clients (i.e. be
outsourced) ?
– Should auditors or audit firms be rotated by client or audit firm
policy or by law ?