Accountants Legal and Ethical Responsibilities

8/2/2019 Accountants Legal and Ethical Responsibilities

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Accountants Legal and

Ethical Responsibilities


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Securities Act of 1933

Objective: To provide prospectiveinvestors with accurate, complete, anddetailed information about newofferings of securities.


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Securities Act of 1933

Requires that all new issues ofsecurities sold in interstate commercemust be registered with the SECbefore sale, unless exempted.Registration includes certified financial

statements and prospectus.Prospectus must also be given to eachnew purchaser.


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Civil and Criminal Penalties

for ViolationLiability extends to Issuer, under writer,

directors/partners, all signers, and experts

(accountants and attorneys) who preparedor certified part of registration statement.CPA liable for false, misleading or omittedinformation.

Plaintiff need not prove reliance by plaintiffDue diligence (reasonable grounds to believe

accuracy) is defense.


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Civil and Criminal Penalties

for Violationa. Criminal fine and/or imprisonment.

Fines up to $10,000 and/or imprisonment up

to five years.

b. Civil Monetary damages toinvestors if there is a failure to register,registration statement or prospectuscontained materially false, misleadingfactual information, or omitted material

factual information.


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Contract

Duty determined by terms of engagement letter.Liability extends to intendedbeneficiaries known to accountant. Lending institutions


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Negligence

A. Duty of professional careB. Failure to act in accordance withthose dutiesC. Proximate causeD. Loss of damage

Liable to client, known third parties,and possibly foreseen parties (sameclass as known third parties)


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FraudRequires knowledge, or grosslynegligent or reckless conduct.Extends liability to reasonablyforeseeable third parties.


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Securities Exchange Act of

1934Regulates ongoing trading of securities

after issuance.

1. Prohibits Fraud(Section 10b,Rule 10b-5

Knowing issuance of financial reportscontaining false, misleading information oromitting material information in a report.(Plaintiff must prove intent and reliance.)


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Racketeer Influenced and CorruptOrganizations Act (1970)

Federal Crime to engage in racketeeringactivity in the acquisition, maintenance or

conduct of the affairs of a businessenterprise or to conspire to do anyracketeering activities.Incorporates by reference 26 federal crimesand 9 state felonies, including: securitiesfraud, mail fraud and wire fraud.Requires two or more offenses.


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RICO

Commission of two or more predicateacts within a 10 year period


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Racketeer Influenced andCorrupt Organizations Act(1970

PenaltiesCriminal - $25,000 per violation Up to twenty years imprisonment

Civil Government : Divestiture ordissolution of business

Private: Treble damages, Attorneysfees


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Duty of Inquiry

If CPA becomes aware of suspiciouscircumstances, he/she has a duty toinquire

A CPA cannot rely on Management'srepresentations.


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Sarbanes-Oxley Act of

2002Creates a five-member public company accountingoversight board. The Board will have fivefinancially-literate members, appointed for five-year

terms. Two of the members must be or have beencertified public accountants, and the remainingthree must not be and cannot have been CPAs.Members of the Board are appointed by theSecurities and Exchange Commission, "afterconsultation with" the Chairman of the FederalReserve Board and the Secretary of the Treasury.

S i 103 A di i Q li


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Section 103: Auditing, QualityControl, And IndependenceStandards And Rules .

The Board shall:(1) register public accounting firms;

(2) establish, or adopt, by rule, "auditing,quality control, ethics, independence, andother standards relating to the preparationof 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" withdesignated professional groups of accountants and any advisory groupsconvened in connection with standard-

setting,


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Section 104: Inspections of RegisteredPublic Accounting Firms

Annual quality reviews (inspections)must be conducted for firms that audit

more than 100 issues, all others mustbe conducted every 3 years. The SECand/or the Board may order

a special inspection of any firm at anytime.


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Section 201: Services Outside The ScopeOf Practice Of Auditors; Prohibited

Activities.

It shall be "unlawful" for a registered publicaccounting firm to provide any non-audit service toan issuer contemporaneously with the audit,

including:(1)bookkeeping or other services related to the

accounting records or financial statements of theaudit client;

(2)financial information systems design andimplementation;

(3) appraisal or valuation services, fairness opinions,or contribution-in-kind reports;


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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;


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Activities.

8) legal services and expert servicesunrelated to the audit;

(9) any other service that the Boarddetermines, by regulation, isimpermissible.

The Board may, on a case-by-case basis, exempt fromthese prohibitions any person, issuer, publicaccounting firm, or transaction, subject to review bythe Commission.


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Section 203: Audit PartnerRotation.

The lead audit or coordinating partnerand the

reviewing partner must rotate off of theaudit

every 5 years.


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Section 302: CorporateResponsibility For Financial

Reports.The CEO and CFO of each issuer shall preparestatement to accompany the audit report to certify the

appropriateness of the financial statements anddisclosures contained in the periodic report, and

that those financial statements and disclosuresfairlypresent, in all material respects, the operations andfinancial condition of the issuer."


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Section 401(a): Disclosures In PeriodicReports; Disclosures Required.

Each financial report that is required to be preparedin accordance with GAAP shall

reflect all material correcting adjustments . . . thathave been identified by a registered accountingfirm . . . ."

"Each annual and quarterly financial report . . .shall disclose all material off-balance sheettransactions" and "other relationships" with"unconsolidated entities" that may have a materialcurrent or future effect on the financial condition of

the issuer.


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Section 401(a): Disclosures InPeriodic Reports; Disclosures

Required.The SEC shall issue rules providingthat pro forma financial information

must be presented so as not to"contain an untrue statement" or omitto state a material fact necessary in

order to make the pro forma financialinformation not misleading.


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Title VIII: Corporate andCriminal Fraud

Accountability Act of 2002.Felony to "knowingly" destroy or create

documents to "impede, obstruct orinfluence any existing or contemplated federal investigation.

Auditors are required to maintain "allaudit or review work papers" for fiveyears.


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Title IX: White Collar CrimePenalty Enhancements

Maximum penalty for mail and wire fraudincreased from 5 to 10 years.

SEC may prohibit anyone convicted of securities fraud from being an officer ordirector of any publicly traded company.Maximum penalties for willful and knowing

violations of this section are a fine of notmore than $5,000,000 and/or imprisonmentof up to 20 years.


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Professional

Responsibilities AICPA Code of Professional ConductPrinciples

A. CPA should exercise sensitiveprofessional and moral judgment in allCPA activities.

B. Demonstrate commitment to

professionalismC. Perform responsibilities with integrity tomaintain public confidence.


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Professional

Responsibilities4. Maintain objectivity and be free of

conflicts of interest.

5. Be independent in fact and inappearance.

6. Strive to improve competence andquality of services and discharge

duties to best of his/her ability.


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Rules

Rule 101 Independence A. CPA shall be independent in the

performance of professional servicesrendered. (Tax and consulting do notrequire independence)


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Independence Rule 101

Impaired by: Direct or material indirect financial interest in

client

Trustee or executor of trust or estate which hasfinancial interest in client Joint of closely-held business investment with

client or officer, director of principal stockholder.

(Fee outstanding for service performed more thanone year prior to audit takes on characteristics of a loan from accountant to client.)


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Competence (Rule 201)

CPA should not undertake anyengagement that the CPA cannot

reasonably expect to complete withprofessional competence.


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Confidentiality (Rule 301)

CPA should not disclose anyconfidential information obtained in

the course of an engagement withoutconsent of the client, unless requiredto do so by law, AICPA regulations or

state CPA societies.


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Contingent Fees (Rule

302)Professional services should not berendered under a contingent fee basis.

Prohibited for the filing of an origial oramended tax return. However,permitted for representing a client inan examination of a clients tax return.


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Discreditable Acts (Rule

501CPA should not commit an act inpersonal or professional life that

discredits the profession

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Accountants Legal and Ethical Responsibilities