Legal Liability

Civil Liability n Need to prove: –Liability? (auditor at fault) –Causation? (failure of audit caused damage) –Damages? (amount of loss) n Another issue: Privity –Have the right to sue? n Another issue: Burden of Proof –Plaintiff or Defendant?

Civil Liability -- Different Criteria n Liability to clients (privity) n Liability to third parties under common law n Liability to third parties under statutory law

Liability to Clients - Concepts n Due care n Comparative negligence defense n Confidential relationship

Common Law - Liability to Third Parties: Level of Auditor’s Fault n Fraud intentional misstatement or concealment of a material fact n Gross negligence flagrant or reckless departure from the standard of due care, or willful and wanton misconduct n Ordinary negligence an unintentional act, a thoughtless slip or blunder

Common Law - Liability to Third Parties Approaches n Primary beneficiaries and near-client equivalents n Foreseen or intended beneficiaries n Foreseeable beneficiaries

Statutory Law - Liability to Third Parties n Securities Act (1933) - Initial Offerings to the Public –Burden of Proof: Defendant n Exchange Act (1934) - Ongoing Reporting –Burden of Proof: Plaintiff

Exchange Act - Rule 10b-5 Need to prove that -- n Auditor made one or more false representation(s) n Plaintiff relied on Auditor’s representations n Auditor knew or should have known representations were false n Damages were caused by Auditor’s representations

Criminal Liability

Noted Legal Cases n Bar Chris n Yale Express n Continental Vending n U.S. Financial n National Student Marketing n 1136 Tenants Corporation n Equity Funding n Fund of Funds n Credit Alliance Corporation n Mann Judd Landau n ESM n Bily n Crazy Eddie

Protection Against Liability n Liability insurance n Quality control n Tort reform

Forensic Accounting