Regulation Exam 3

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  1. Agency
    Legal relationship in which one person or entity (the principal) appoints another person or entity (the agent) to act on his behalf
  2. What is required to create an agency relationship?
    A principal with contractual capacity and the consent of both parties
  3. Power of attorney
    A written authorization of agency; there is no requirement that the agent sign
  4. Duties of agent to principal
    • Duty of loyalty
    • Duty of obedience
    • Duty of reasonable care
    • Duty to account - must account to the principal for all property and money received and paid out
  5. Principal's remedies
    • Tort damages - negligence or fraud
    • Contract damages - consideration must have been given to the agent
    • Recovery of secret profits
    • Withhold compensation
  6. Duties of principal to agent
    • Compensation - must be an agreement to the contrary otherwise
    • Reimbursement
  7. Remedies of the agent
    Can sue for damages but has a duty to mitigate those damages beforehand
  8. Power to terminate vs right to terminate
    Either party can generally terminate the contract at will, but if they violate the terms of the contract by doing so, the other party can sue for breach of the contract
  9. When can the principal not terminate the agency contract?
    When the agency relationship is coupled with an interest, where the agent has paid for the right to be appointed as the agent
  10. Actual authority
    The authority the agent reasonably believes he possesses because of the principal's communication to the agent
  11. Implied actual authority
    The authority to do things reasonably necessary to carry out the agency and also things the principal has repeatedly allowed the agent to do
  12. Termination of actual authority
    • Act of the parties
    • Accomplishment of objective or expiration of stated period
    • By operation of law (death, incapacity of principal, discharge in bankruptcy of principal, failure to acquire a necessary license, destruction of the subject matter or subsequent illegality)
  13. Apparent authority
    Where the agent nevertheless have the the power (but not the right) to bind the principal, either because the principal's conduct has caused third parties to reasonably believe the agent had authority or because the principal was negligent ans so will be estopped from denying that the agent had authority
  14. Ratification
    Allows a principal to choose to become bound by a previously unauthorized act of his agent
  15. Requirements for ratification
    • Agent must have indicated that he or she was acting on behalf of the principal
    • All material facts must be disclosed to the principal
    • The principal must ratify the entire transaction
  16. Contractual Liability
    The principal will be liable if the agent had authority or the principal ratified, as long as the principal was disclosed (an undisclosed principal will only be liable for areas of actual authority)
  17. Third party liability
    Generally, only the principal can hold a third party liable, except where the principal's identity was fraudulently concealed or the performance to the principal would increase the burden on the third party
  18. Tort Liability
    Generally, the principal is not liable for the torts committed by his agent
  19. When is a principal liable for the torts of his agent?
    When the agent is his employee (rigidly defined) and the injury must have occurred within the scope of the employment
  20. Chapter 7 Liquidation
    Bankruptcy for I, P, or C where the trustee collects the debtor's assets, liquidates them, and uses the proceeds to pay off creditors; an individual debtor's debts are then discharged
  21. Chapter 13 Adjustments of Debts of Individuals with Regular Income
    Bankruptcy for I only which is voluntary only where the debtor repays all or a portion of his debts over a 3-5 year period
  22. Chapter 11 Reorganization
    Bankruptcy for I, P, or C where the debtor remains in possession of his assets and a plan of reorganization is adopted; creditors are paid to the extent possible and the business continues
  23. Dismissal of a Chapter 7 Case (I only)
    • If debtor's average monthly income x12 exceeds state median income, proceed to means test
    • Take current net monthly income multiplied by 60
    • If $11,725 or more, case dismissed/converted
    • If between $7,025 and $11,725 and is at least 25% of the debtor's unsecured claims, case dismissed/converted
  24. Who can't file Chapter 7 (RIBS)?
    • Railroads
    • Insurance
    • Banks
    • Savings and loan
  25. Who can't file Chapter 11 (BIBS)?
    • Brokers
    • Insurance
    • Banks
    • Savings and loan
  26. Automatic stay
    Only for Chapter 7 and Chapter 11 cases; does not apply to criminal prosecutions, paternity suits and cases brought to establish spousal or child support obligations
  27. Involuntary case
    Unsecured creditors may petition a debtor involuntarily into bankruptcy proceedings under Chapter 7 or 11; there won't be an automatic stay
  28. Thresholds for petition to be filed
    • Aggregate of at least $14,425 in unsecured undisputed debt
    • Fewer than 12 creditors - 1 or more owed $14,425
    • 12 or more creditors - 3 owed at least $14,425 in aggregate
  29. Creditors' meeting
    All interested parties, including creditors, the bankruptcy trustee and the debtor must be given notice of the meeting and the debtor must attend. The meeting gives creditors a chance to examine the debtor
  30. Included property
    • All of the debtor's real and personal property at the time of filing
    • Income from estate property
    • DII (divorce, inheritance, insurance)
  31. Excluded property
    • Post-petition earnings
    • Spendthrift trusts
    • Educational IRAs
    • State tuition programs
    • Generally things necessary to live (homestead, motor vehicle, household goods, crops and animals, unmatured life insurance contracts, tools of a trade/professional books, health aids, government benefits and alimony, support or maintenance)
    • The above exemptions will not apply if there is a PMSI, mortgage or tax lien associated with the property
  32. Trustee's power as a lien creditor
    The trustee has priority over all creditors except those with prior perfected security interests or prior statutory or judicial liens
  33. Fraudulent transfers
    Any transfer made with intent to hinder, delay, or defraud creditors or any transfer where the debtor received less than equivalent value while the debtor was insolvent; trustee can set aside any in the last two years
  34. Preferences
    • A transfer made to or for the benefit of a creditor
    • On account of the antecedent debt of the debtor
    • Made within 90 days prior to the filing of the petition (or one year if creditor is an insider)
    • Made while the debtor was insolvent and
    • That results in the creditor receiving more than the creditor would have received under the Bankruptcy Code
    • A payment to a fully secured creditor is not a preference
  35. Exceptions to preferences
    • Transfers in the ordinary course of business
    • PMSI perfected within 30 days
    • Consumer payments under $600
    • Domestic support obligations
  36. Claims against the estate
    To take part in the distribution of the debtor's assets, an unsecured creditor must file a proof of claim and a shareholder must file a proof of interest
  37. Objections to discharge of debts under Chapter 7
    • Debtor not an individual
    • Fraudulent transfers or concealment of property
    • Unjustifiably failed to keep books and records
    • Prior discharge within 8 years
    • Commission of a bankruptcy crime
    • Failure to explain loss of assets
    • Refusal to obey orders and answer questions
    • Improper conduct in an insider's case
    • Waiver
    • Failure to complete financial management course
  38. Exceptions to discharge (certain debts not discharged: WAFTED)
    • Willful and malicious injury (not negligent torts, though)
    • Alimony, maintenance, support and settlements from marital separation
    • debts incurred by Fraud
    • Taxes due within 3 years of filing
    • Educational loans
    • Debts undisclosed in the bankruptcy petition
  39. Reaffirmation of discharged debts
    • The agreement to reaffirm the debt was made before the granting of the discharge
    • The agreement contains a clear and conspicuous provision that the debtor has the right to rescind the agreement any time prior to discharge or 60 days after the agreement is filed
    • Upon a discharge the debtor's attorney or the court informs the debtor that reaffirmation is not required by law and advises the debtor of the legal effect of reaffirmation
  40. Revocation of discharge
    • The debtor obtained the discharge fraudulently and the party seeking revocation did not discover the fraud until after the discharge was granted
    • The debtor acquired property that would constitute property of the estate and knowingly or fraudulently failed to disclose this fact
    • The debtor failed to obey a court order or answer material questions
    • The debtor has not given a satisfactory explanation for a failure to make documents available
  41. Order of priority for claimants (SAGWEGCTI)
    • If there isn't enough at any level, the creditors share pro rata in what is left
    • Secured claimants
    • Support Obligations to spouse and children
    • Administrative expenses
    • Gap Claims from involuntary case
    • Wage claims up to $11,725
    • Employee benefit plans up to $11,725
    • Grain farmers and fishermen up to $5,775
    • Consumer deposits up to $2,600
    • Tax Claims
    • personal Injury claims from Intoxicated driving
    • Unsecured claims
  42. Creditors' Committee
    Committee of unsecured creditors consisting of willing persons holding the seven largest unsecured claims against the debtor. This committee has the power to consult with the debtor, investigate the debtor's finances and participate in preparing the debtor's reorganization plan
  43. Features of Chapter 11
    • Creditors' committee
    • No trustee appointed
    • Debtor has right to file a reorganization plan during the first 120 days after the order for relief is effective
  44. Acceptance of plan
    To be accepted, the plan must be approved by creditors holding 2/3 of the amount owed and more than 1/2 of the claims
  45. Confirmation of the plan
    The court will confirm the plan and a confirmed plan is binding on all creditors, equity security holders and the debtor regardless of whether they accepted the plan and discharges all pre-confirmation debt except WAFTED
  46. Securities Act of 1933
    Assures that investors have sufficient information on which to make an informed investment decision by requiring most issuers to register new issues (IPOs) of securities with the SEC and provide prospectuses containing material information to prospective investors
  47. Prospectus
    A written offer to sell securities which each investor must receive a copy of before or contemporaneous with every sale of the security
  48. What else must the registration statement include?
    • An audited balance sheet and income statement
    • Names and addresses of the directors, officers, underwriters and 10% or more shareholders
    • Amount of stock and debt being issued
    • Principal purpose for the offering proceeds
    • Anything that might affect the value of securities being issued
  49. Shelf registration
    One registration statement for all securities; this is generally prohibited unless the issuer has continually filed under the 1934 Act for one year and the information is continually updated
  50. Timetable of sales activity
    • 30 days before registration - no sales and no ads; issuer is permitted to negotiate with an underwriter
    • 20 days between registration and filing date - no sales but ads are allowed now
    • After the registration is effective - sales can begin
  51. Exemptions from registration (BRINGS)
    • securities issued by Banks and savings and loans
    • securities of Regulated common carriers
    • Insurance policies
    • securities issued by Not-for-profit organizations
    • securities issued by the Government
    • Short-term commercial paper with a maturity date of nine months or less
  52. Regulation A partial exemption
    Permits a simplified form of registration (unaudited F/S) where sales may not exceed $5 million in a 12 month period
  53. Regulation D
    Has 3 private offering exemptions where general solicitation is usually prohibited, the purchasers may not immediately reoffer securities to the public, and the SEC must be notified of the issuance within 15 days after the first sale
  54. Rule 504
    Issuance may not exceed $1 million within a 12 month period, but there is no limit on the number or type of purchasers
  55. Rule 505
    Issuance of securities may not exceed $5 million within a 12 month period and securities may be sold to any number of accredited investors and 35 or fewer unaccredited investors
  56. Rule 506
    No limit on the dollar amount but may only be sold to accredited investors and up to 35 unaccredited but sophisticated investors
  57. Liability under the 1933 Act
    • Section 11 imposes civil liability for misstatements
    • Section 12 imposes a civil liability if a required registration was not made, if a prospectus was not given to all investors or if materially false statements were made or omitted in connection with sales or offers to sell
    • Section 17 imposes criminal penalties against anyone who uses any type of fraud in connection with the issuance of a security
  58. Section 11 (LAM)
    • The plaintiff suffered a Loss
    • The plaintiff Acquired the stock
    • The registration statement contained a Material misrepresentation or Material omission of fact
  59. Liability under Section 11
    • Anyone who signs a registration statement may be liable under Section 11
    • Best defense is the due diligence defense
    • Other defenses include that the misstatement did not cause the plaintiff's damages
  60. Securities Exchange Act of 1934
    This is concerned with exchanges of securities after they are issued. It has registration and reporting provisions that apply only to certain companies and antifraud provisions that apply to all purchasers and sellers, regardless of registration. The SEC can seek suspension or revocation of a company's registered securities for violation
  61. 1934 Act registration requirements
    • Companies whose shares are traded on a national exchange or companies that have at least 500 shareholders in any outstanding class and more than $10 million in assets
    • National stock exchanges, brokers and dealers must also register
    • Must include the company's financial structure, nature of business and outstanding securities, names and remuneration of important people and material contracts
    • Must include audited F/S
    • Investment companies, savings and loans and charitable organizations are exempt
  62. 1934 Act reporting requirements (Report 5% TIP)
    • All companies required to register under the 1934 or 1933 Act must report the following:
    • Periodic business Reports
    • 5% owners must report background information, source of funds and purpose for buying
    • Tender offers - an offer to all shareholders to purchase a stock for a specific price for a specified period of time
    • Insiders - must disclose their holdings and make monthly updates (34 Act limits insider trading)
    • Proxy solicitations and Proxy statements
  63. 34 Act Rule 10b-5
    Prohibits fraud in connection with the purchase or sale of any security even if registration is not required; must prove all elements of MAIDS as opposed to just LAM
  64. Who is a CPA liable to for breach of contract?
    Client or named third party beneficiaries can sue for compensatory damages and if the breach was material, CPA is not entitled to compensation at all. Defense is that CPA was hindered in performing contractual duties
  65. Elements of ordinary negligence
    • Defendant owed a duty of care
    • Defendant breached that duty
    • Breach caused plaintiff's injury
    • There were damages
  66. Common examples of CPA ordinary negligence
    • Failure to warn about known internal control weakness
    • Failure to properly supervise/review the work being done
  67. Who is CPA liable to for ordinary negligence?
    • To any person or the limited forseeable class of persons whom the CPA knows will be relying on the CPA's work (such as potential lenders or investors
    • Best defense is due diligence as the standard of care owed by a CPA is the same skill and care expected of ordinary prudent CPAs under the circumstances
  68. Gross negligence or constructive fraud
    Same elements of actual fraud except instead of intentionally deceiving, the defendant acts recklessly with regard to the truth
  69. CPA's liability for fraud/gross negligence
    • Liable to anyone who can prove the elements of either
    • Best defense is good faith (essentially a lack of scienter)
  70. Accountant-client privelege
    Generally there is no accountant-client privilege under federal law and most states follow that view
  71. When might an accountant have to show the workpapers for a client without their permission?
    • When subpoenaed
    • To a prospective purchaser of the CPA's practice without disclosure of confidential information
    • To a voluntary quality control review panel
    • To defend a lawsuit brought by a client
    • Official investigation of the AICPA/state trial board
    • If GAAP or GAAS requires disclosure
Card Set:
Regulation Exam 3
2013-01-03 20:53:28
CPA Regulation Exam

Becker R7
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