Deck 52: Liability and Regulation of Accountants

Question 1

There is a long and sorry history of accounting scandals over-at least-the last forty years.

Answer 1

True

Question 2

Merely concealing facts that would correct a misimpression is not fraud.

Answer 2

False

Question 3

Under GAAP, audits must be designed to provide reasonable assurance that inaccurate financial statements will be discovered.

Answer 3

True

Question 4

An auditor's liability for fraud is potentially much more far-reaching than her liability for negligence.

Question 5

An accountant who fails to complete a project on time would not be liable for breach of contract the same way a non-professional would be.

Question 6

Accountants are most broadly liable for negligence under the "reasonably foreseeable plaintiffs" test.

Question 7

Today, those not in privity of contract with an accountant-auditor have no remedy for fraud committed by the accountant.

Question 8

An accountant may be found liable if he fails to follow the standards of the accounting profession, not just if he fails to act as a reasonably prudent person would.

Question 9

An auditor who commits fraud will be liable to anybody who might reasonably have been presumed to rely on the auditor's statement.

Question 10

Modern professional standards dictate that the account will ferret out fraud; he is a "bloodhound, not just a watch dog."

Question 11

"Scienter" as an element of fraud means there must be a connection between the fraud committed and the harm caused.

Question 12

An accountant's silence cannot be the basis for a claim of fraud.

Question 13

An opinion rendered by an accountant is, like any opinion, not to be taken as reliable fact.

Question 14

A vexing issue for accountants is to whom does liability for the accountant's negligence flow.

Question 15

The "primary benefit" test held that an accountant would be liable for negligence only to those who are in privity of contract or privity-like relationships with the accountant.

Question 16

Common law has for centuries imposed standard contract law on accountants.

Question 17

Federal and state law has only recently-in the last ten or so years-begun to seriously regulate accountants (aside from antitrust issues).

Question 18

Under the majority rule and the Restatement of Torts, a negligent auditor may be liable to potential investors (called the "foreseen users" test).

Question 19

An accountant effectively guarantees the complete accuracy of her work.

Question 20

In determining whether an accountant is negligent, the courts use the normal standard: accounts are expected to act as a "reasonable person" would under the circumstances.

Question 21

Accountants are rarely found liable for violating SEC Rule 10b-5 (prohibiting manipulative and deceptive practices to sell securities in interstate commerce).

Question 22

"Due diligence" is not a defense to making false statements in an SEC registration.

Question 23

An auditor's working papers--documents, notes of inter?views and audits, and other papers that the auditor prepares in the course of his work for a client belong to the client and must be surrendered by the auditor-accountant upon demand.

Question 24

The Act of 1934 gives rise to the possibility that accountants could be found criminally liable.

Question 25

An auditor who accepts erroneous corporate information which becomes part of an SEC filing may be found liable.

Question 26

There are no generally applicable state laws equivalent to the federal acts of '33 and '34 that regulate accountants.

Question 27

The SEC may suspend the right of an accountant to practice before the Commission.

Question 28

Sellers of securities may be liable for false statements or omissions in prospectuses and communications, but usually accountants, not being the sellers, will not be liable.

Question 29

The Securities Act of 1933 does not apply to the sale of already-existing securities.

Question 30

Usually, unlike common-law misrepresentation, under the Act of 1933, an investor need not show that she relied on false or misleading registration statements.

Question 31

There can be no private action for damages under Rule 10b-5 in the absence of a charge that the defendant accountant intended to deceive, manipulate, or defraud.

Question 32

Under no circumstances can an accountant's right to practice before the SEC can be suspended without a due-process hearing.

Question 33

The Private Securities Litigation Reform Act of1995 (PSLRA) makes it more difficult for plaintiffs to successfully bring a lawsuit for fraud in securities transactions.

Question 34

An accountant's liability for making an untrue statement of fact, or for omitting a material fact required to be stated, in a securities registration statement will usually not, without more, give rise to liability under the Securities Act of 1933.

Question 35

Because SOX's provisions only apply to publicly-traded companies and the accounting firms that audit and consult with them, it has little effect on non-publicly traded firms.

Question 36

The accountant-client privilege

A) is protected by common law.
B) is effectively accomplished by the accountant's professional obligations of confidentiality regarding accountant-client communications.
C) is recognized by statute in some jurisdictions.
D) cannot be waived by the client.
E) is not affected if an outsider is present during the accountant-client communication.

Question 37

Which of the following does the Sarbanes-Oxley (SOX) Act of 2002 not provide for: that

A) a client company's auditors and its financial consultants come from different accounting firms.
B) it is illegal to destroy or falsify records to impede investigations into securities fraud.
C) whistle-blowers should be protected
D) executive pay should be clearly disclosed in annual corporate reports.
E) a new federal administrative agency is created, the Public Accounting Oversight Board.

Question 38

It is not very common for an accountant to be found liable for malpractice in regards to statements related to new public offerings.

Question 39

State overseers may revoke an accountant's license to practice for the vaguely-defined reason that he or she has acted unprofessionally.

Question 40

Scienter must be shown in Rule 10b-5 cases.

Question 41

Escott v. BarChris Construction Co., the famous 1968 case from the federal district in New York, established that auditors

A) cannot be liable for auditing malpractice unless they act with scienter-an intention to deceive.
B) are only liable for taking into consideration what they are given by the client.
C) cannot use the "due diligence" defense.
D) are expected to verify the answers to questions asked by them of top management.
E) none of the above.