Chapter 16 Professional Liability. The Legal Environment Affecting Litigation against Auditors Liability that affects CPA firms is derived from the following.

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Presentation transcript:

Chapter 16 Professional Liability

The Legal Environment Affecting Litigation against Auditors Liability that affects CPA firms is derived from the following laws: Statutory law Common law Contract law

The Legal Environment Affecting Litigation against Auditors (cont’d) Joint and Several Liability Audit Time and Fee Pressures Audits Viewed as an Insurance Policy Contingent-Fee Compensation for Lawyers Class Action Suits

Legal Concepts The Auditor must understand Concepts of breach of contract and tort Parties who may bring suit Legal precedence and statutes that may be used as a standard Defenses available to auditors

Legal Concepts Causes of legal action  Breach of contract  Negligence  Gross negligence (constructive fraud)  Fraud Scienter

Legal Concepts Parties that may bring suit against auditors Liability to clients  Breach of contract  Negligence  Misleading financial statements

Legal Concepts Common-law liability to third parties  Foreseeability and Negligence: Common Law  The Ultramares case: The third-party beneficiary test  Expansion of Ultramares: The identified user test  Foreseen user test  Foreseeable user test  Current status

Legal Concepts Statutory Liability to Third Parties Securities Act of 1933 Securities Act of 1934

Legal Concepts Criminal Liability to Third Parties Continental Vending (U.S. v. Simon) Equity Funding

Legal Concepts Liability Impact of Internet Dissemination of Audited Financial Information Summary of Auditor Liability to Third Parties Auditor defenses  Due diligence  Statements not materially misstated  Audit not the cause of loss  Auditor has no duty to the plaintiff

Approaches to Mitigating Liability Exposure Continuing Education Requirement Membership Requirements for Firms Quality Control Programs  External peer reviews  Internal peer reviews

Defensive Auditing Engagement letters Client screening Evaluating the firm’s limitations Maintaining accurate and complete working papers Limited Liability Partnerships (LLP) Role of insurance Tort reform

Effect of Court Cases on Auditing Standards and Practice Engagement letters Audit Procedures Subsequent Events Related-Party Transactions

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