Law 1

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  1. Liability to Client under common law
    breach of contract
    Breach of an expressed duty - didn't do what you said you were going to do

    Breach of an implied duty - didn't do it in a competent manner

    • Levels of Performance
    • 1. Complete Performance
    • 2. Substantial performance - Will only pay the contract obligation minus any damages
    • 3. Material breach - entitled to compensatory and consequential damages(if foreseeable)
  2. Liability to client under common law
    • Plaintiff(client) must prove:
    • - duty of care
    • - breach of duty (unreasonable behavior)
    • - causation (cause in fact, proximate cause(reasonably foreseeable))
    • - Damages, compensatory

    can use contributory/ comparative negligence as a defense
  3. Liability for client under common law
    Plaintiff(client) must prove MS RID

    • Material misrepresentation or omission of fact
    • Scienter - knowledge of misrepresentation and intent to deceive OR reckless disregard for truth of statements to be relied on
    • Reliance by plaintiff
    • Intent to rely in misrepresentation
    • Damages caused by the reliance

    Punitive damages are also available to the plaintiff
  4. Liability to third party under common law
    • 1. Negligence
    • - Privity Rule
    • - Restatement rule
    • - general Negligence

    2. Fraud
  5. Privity Rule
    • Most protective of accountants
    • Ultramares Rule
    • Accountant can only be liable to client(privity) and known primary beneficiaries (near privity)
    • Accountant must be aware that the use of the work is for a particular third party, and agree that the work will be used in a particular way.
    • About half the states adhere to this rule including MD
  6. Restatement Rule
    • middle ground, modern rule
    • third party must be in the "intended class of users" in order to hold the accountant liable for negligence
    • focuses on the intended use of the work rather than the parties
    • about half the states- FL, Michigan, Ohio, Texas
  7. general negligence
    • least protective
    • any third party who was a "reasonably foreseeable user" of the accountants work can hold the accountant liable for negligence
    • focuses on accountants serving as a public trust
    • only Mississippi currently uses this rule.
  8. Liability to third party under common law
    Must prove MS RID

    Rationale: accountants owe a duty to all third parties to prepare their reports without fraud, whether such reports are intended primarily for the benefit of third parties or not

    Caveat: must be a casual relationship between the misrepresentation and the plaintiffs’ damages, which is often more difficult to prove for third parties
  9. Securities act of 1933
    • Regulates initial public offerings of securities
    • requires a registration statement be filed with the SEC - which discloses all material facts regarding the offered securities, must include financial statements audited but an independent public accountant, must be made with due diligence
    • protects any person acquiring securities covered by the registration statement may sue the accountant
  10. Securities act of 1933
    What must the plaintiff show?
    Must show: the audited financial statements contained a false statement or omission of a material fact

    The burden of proof then shifts to the defendant and they must prove that she was not negligent, not fraudulent, and acted with due diligence
  11. Due diligence
    must prove that the accountant

    • -made a reasonable investigation
    • -had a reasonable basis for her belief
    • -and did infact believe that the financial statements that she audited and gave opinions on did fairly represent the financial condition of her client on the day for the time period involved
  12. Securities Act of 1933
    Possible defenses
    • Information was truthful as of the date the registration statement became effective
    • Omission was not material
    • Lack of causation - the plaintiffs loss was caused by something other than the misstatement or omission
    • Statute of Limitations
  13. Securities Act of 1933
    Statute of Limitations
    Plaintiff must file a lawsuit within one year after the discovery, and no later than three years after the security is offered
  14. Securities Act of 1933
    • Difference between the amount paid for the securities and:
    • - the value at the time of the Law suit
    • OR
    • - the value at the time of the disposal prior to the lawsuit

    The recovery may not exceed the price at which the security was offered to the public
  15. Securities Exchange Act of 1934
    Requires and annual report

    Prohibits fraudulent behavior in the secondary market

    for accountants this usually means the financial statements issued with the annual report
  16. Securities Exchange Act of 1934
    Prohibits Fraud

    must prove MS RID

    Any person who makes a statement that is false or misleading with respect to any material fact may be sued
  17. Securities Exchange Act of 1934
    Who does it protect?
    • Any buyer of seller of a security to which the false statement relates may sue the accountant, provided she:
    • - bought or sold at a price affected by the false statement
    • - relied upon the statement, and
    • - did not know of its falsity
  18. Securities Exchange Act of 1934
    Accountant Defense?
    • Good faith - lack of Scienter
    • No knowledge that the statement was false or misleading
    • No intent to deceive to gain an unfair advantage
  19. Constructive Knowledge
    a reckless disregard for the truth, turning a blind eye

    This is not acting within good faith
  20. "Controlling person"
    both 1933 and 1934 have controlling person provisions, so supervisors, managers, and firms cannot escape liability
  21. Criminal Liability
    Both 1933 and 1934 contain criminal provisions and penalties

    1933 - fine not more than 10,000 and imprisonment for not more than 5 years

    1934 - fine not more than 5mil for an individual and/or imprisonment for not more than 20 years (fine not more than 25 mil for a firm)
  22. Working Papers
    Owned by the Accountant, but the company owns the information

    Only have to turn over to the federal government, or an accounting board

    save for 5 years
  23. Privileged communications
    Accountant may NOT refuse to testify regarding client communications

    About a third of the states extend the privilege including MD, but DE does not.
  24. Relativism

    morality is relative
  25. Situational Ethics
    Imagine ourselves in the shoes of the person facing the dilemma
  26. Consequentialism
    Kantian Ethics

    Certain actions are right or wrong regardless of the consequences
  27. Virtue Ethics
    focuses on Virtues that guide behavior
  28. Ethics of Care
    good human relationships are paramount
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Law 1
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