Question 1

________ imposes civil liability on accountants and others for making misstatements or omissions of material facts in a registration statement, or failing to find such misstatements or omissions.

Accepted Answer

Section 11(a) of the Securities Act of 1933 imposes civil liability on accountants and others for making misstatements or omissions of material facts in a registration statement, or failing to find such misstatements or omissions. This section pertains to disclosures made in connection with initial public offerings and sets forth strict liability for false or misleading statements made in registration statements. This section is designed to ensure that investors receive accurate and complete information when making investment decisions.

Question 2

Only purchasers and sellers of securities can sue under Section 10(b) and Rule 10b-5.

Accepted Answer

Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 prohibit fraudulent activities related to the purchase or sale of securities. As such, only purchasers and sellers of securities have standing to sue for violations of these provisions.

Question 3

Why do accountants come under the purview of Section 18(a) of the Securities Exchange Act of 1934?

Accepted Answer

Accountants come under the purview of Section 18(a) of the Securities Exchange Act of 1934 because they often file reports and other documents with the SEC on behalf of clients. This section holds accountants responsible for any false or misleading statements made in these documents, making them liable for any damages resulting from misstatements or omissions.

Question 4

Under the foreseeability standard, an accountant is liable even if he or she had no knowledge of the intended user of the audited financial statements.

Accepted Answer

Under the foreseeability standard, an accountant is held liable for any foreseeable users of the audited financial statements, regardless of whether or not the accountant had knowledge of their intended use.

Question 5

In which of the following ways can an accountant defeat the imposition of liability under Section 18(a)?

Accepted Answer

Under Section 18(a) of the Exchange Act, an accountant can defeat the imposition of liability if he or she can show that the plaintiff had knowledge of the false statement. This defense is known as the "one-on-one conversation" defense, where if the plaintiff had a one-on-one conversation with the defendant and knew or should have known that the statement was false, then the defendant would not be liable. The other choices do not provide valid defenses for defeating liability under Section 18(a).

Question 6

The legal theory that holds accountants liable to any member of a limited class of intended users for whose benefit the accountant has been employed is the Section 552 of the Restatement (Second) of Torts.

Accepted Answer

Section 552 of the Restatement (Second) of Torts outlines the legal theory of liability for accountants. It holds them liable to any member of a limited class of intended users for whose benefit the accountant has been employed.

Question 7

Pursuant to federal securities laws, an audit must be performed by a certified public accountant (CPA) who works closely with the company in the capacity of a chief executive officer (CEO) or a chief financial officer (CFO).

Accepted Answer

An audit must be performed by a CPA, but they are independent of the company and do not work in the capacity of a CEO or CFO.

Question 8

Third parties cannot sue accountants for breach of contract.

Accepted Answer

Third parties are not in privity of contract with the accountant, meaning they are not a party to the contract and therefore cannot sue for breach of contract.

Question 9

Explain Section 552 of the Restatement (Second) of Torts.

Accepted Answer

The answer of Explain Section 552 of the Restatement (Second)...

Question 10

Which of the following is true of Section 10A of the Securities Exchange Act of 1934?

Accepted Answer

Section 10A of the Securities Exchange Act of 1934 mandates auditors to report illegal acts they find during the audit of a company's financial statements to the company's board of directors. If the issue is not adequately addressed, the auditor must report it to the Securities and Exchange Commission (SEC). This section does not deal with probate processes, provide a specific defense for accountants regarding civil liability, or impose criminal liability for misstatements in nonaudit services.

Question 11

The Securities Act of 1933 requires that before a corporation or another business sells securities to the public, the issuer must file a registration statement with the Securities and Exchange Commission (SEC).

Accepted Answer

The Securities Act of 1933 does require issuers to file a registration statement with the SEC before selling securities to the public.

Question 12

________ is a law that prohibits any manipulative or deceptive practice in connection with the purchase or sale of a security.

Accepted Answer

Section 10(b) of the Securities Exchange Act of 1934, along with Rule 10b-5, prohibits any manipulative or deceptive practice in connection with the purchase or sale of a security. This includes actions such as insider trading, false statements or omissions, and market manipulation. Sections 11(a) and 32(a) are related to other aspects of securities law, while the Uniform Securities Act is a model framework for state securities regulation.

Question 13

Ordinary negligence by an accountant is not a violation of Section 10(b) and Rule 10b-5.

Accepted Answer

Section 10(b) and Rule 10b-5 only apply to cases of fraud, intentional misconduct, or reckless behavior by an accountant. Ordinary negligence, while potentially a breach of ethical or professional standards, does not reach the level of intentional or reckless behavior required to violate these securities laws.

Question 14

________ is a rule that limits a defendant's accountability to his or her equivalent degree of fault.

Accepted Answer

Proportionate liability (also known as comparative fault) limits a defendant's liability to their percentage of fault. This means that even if the plaintiff is partially at fault for the harm they suffered, the defendant is only responsible for their portion of the fault. This rule is used in many states in the United States.

Question 15

Which of the following can be used by an accountant to counter liability imposed under Section 11(a) of the Securities Act of 1933?

Accepted Answer

The due diligence defense can be used by an accountant to counter liability imposed under Section 11(a) of the Securities Act of 1933. This defense requires the accountant to prove that they made a reasonable effort to verify the accuracy of the financial statements and that any errors or omissions were not due to a lack of due diligence on their part. The nolo contendere rule is a criminal law concept that is not applicable in civil liability cases. The Ultramares doctrine limits the liability of an accountant to only those parties with whom they have a privity of contract, which may not be applicable in all cases. The foreseeability standard is not a defense against liability under Section 11(a) of the Securities Act.

Question 16

Which of the following legislations makes it a criminal offense to willfully make any untrue statement of material fact in a registration statement filed with the SEC?

Accepted Answer

Section 24 of the Securities Act of 1933 makes it a criminal offense to willfully make any untrue statement of material fact in a registration statement filed with the SEC. This includes any statement in the prospectus, amendments, or supplements to the registration statement.

Question 17

A due diligence defense cannot be asserted by an accountant against the civil liabilities of Section 11(a) of the Securities Act of 1933.

Accepted Answer

An accountant can assert a due diligence defense against the civil liabilities of Section 11(a) of the Securities Act of 1933, by demonstrating that they conducted a reasonable investigation and had reasonable grounds to believe, and did believe, that the statements in the registration statement were true and without omissions of material facts.

Question 18

A verification of a company's books and records pursuant to federal securities laws, state laws, and stock exchange rules that must be performed by an independent certified public accountant (CPA) is known as a(n) ________.

Accepted Answer

An audit involves an independent certified public accountant (CPA) verifying a company's books and records in accordance with federal securities laws, state laws, and stock exchange rules. Probate and ademption are related to the distribution of a deceased person's assets, and a deposition is a legal proceeding where a witness provides testimony under oath outside of a courtroom setting.

Question 19

A third party can bring a tort action against an accountant in case of constructive fraud.

Accepted Answer

Constructive fraud occurs when the accountant does not intend to cause harm but their actions or behavior were reckless or careless and resulted in harm to a third party. In such cases, the third party can bring a tort action against the accountant.

Question 20

Which of the following is true of Rule 10b-5?

Accepted Answer

Rule 10b-5, promulgated under the Securities Exchange Act of 1934, is designed to protect investors by preventing fraud in the securities market. It specifically allows purchasers and sellers of securities to sue for damages if they have been defrauded in connection with the purchase or sale of securities. The rule does not require privity of contract between the parties for a lawsuit to be brought, nor does it prohibit civil private lawsuits; in fact, it is a primary mechanism for such actions. Additionally, the standard for violation of Rule 10b-5 goes beyond ordinary negligence, requiring scienter, which means a wrongful state of mind, such as intent to deceive, manipulate, or defraud.

Quiz 51: Accountants Duties and Liability