Chapter 6 4e UPDATED

Legal, Regulatory, and
Professional Obligations of
Auditors
Chapter 6
Copyright ©2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Questions to Consider
• PwC audits of failed investment company MF

Global
• EY audits of Repo 105 of Lehman Brothers
Holdings
• What is the link between professional ethics

and legal liability?
• What are the standards of practice that underlie
potential legal liability?
• When can legal liability exist in global
operations?
Legal Liability of Auditors:
An Overview
• Zoe-Vonna Palmrose identifies the 4 general

stages in audit-related dispute:
• Events that result in losses for users of the financial
statements
• Investigation by plaintiff attorneys to link the user
losses with allegations of material omissions or
misstatements of financial statements
• Filing of the lawsuit
• Final resolution of the dispute
• Auditors can be sued by clients, investors,
creditors, and the government
• Auditors can be held liable under common and
statutory law
Common and Statutory Law
• Common law
• Evolves from legal opinions issued by judges in deciding
a case
• Breach of contract is a claim that accounting or auditing
services were not performed in a manner proscribed in
the contract (brought by clients)
• Tort actions cover other civil complaints (brought by
clients and users of financial statements)
• Fraud
• Deceit
• Injury
• Statutory law
• Legislation passed at state or federal level that
establishes certain courses of conduct that must be
adhered to by parties
Common Law Liability
• Auditor must perform professional services with

due care
• Evidenced by having exercised same degree of skill
and judgment possessed by others in the profession
• Adherence to generally accepted auditing
standards can provide evidence of having
exercised due care in the audit
• Due care includes exercising the degree of
professional skepticism expected in the audit of
financial statements
• Audit failures – all possible causes – breach of
contract, tort, deceit, and fraud
Liability to Clients - Privity
• A contractual obligation to the client that creates a privity

relationship
• A client can bring a lawsuit against an accountant for failing to
live up to terms of the contract; plaintiff must demonstrate:
• Economic loss
• Auditors breached contract
• Auditors failed to exercise appropriate level of professional care
• Auditors breach or failure of care caused the loss
• Link of ethical responsibilities of auditors through the due care
ethics rule and the universality perspective (Kantian Rights)
• Fraud includes gross negligence or constructive fraud that
represents an extreme or reckless departure from
professional standards of care
• Ultramares v. Touche, 1933
• Third party not in contractual privity cannot sue based on
negligence
• Left open possibility for gross negligence and fraud
Liability to Third Parties
Near-Privity Relationship
• Near privity relationship established in Credit

Alliance v. Arthur Andersen & Co
• Case establishes tests for holding auditors
liable for negligence to third parties
• Knowledge that financial statements to be used for a
particular purpose
• Intention of third party to rely on financial statements
• Action linking the accountant and the third party
• Security Pacific Business Credit, Inc. v. Peat
Marwick Main & Co.
• Sharpened last criteria of near privity test:
• The auditor must directly convey the audited report to
the third party, OR
• The auditor acts to induce reliance on the audit report
Actually Foreseen Third Parties
• “Middle ground” approach followed by most states

expands class of third parties that can successfully sue
auditor for negligence beyond near-privity to limited
group whose reliance is (actually) foreseen, but not
necessarily known to the auditor
• Rusch Factors, Inc. v. Levin, 1968
• Rhode Island federal court held an accountant liable for
negligence to a third party not in privity of contract
• Restatement (Second) of Torts
• Expands an accountants’ legal liability for negligence to any
third parties (foreseen third party) identified as intended
recipients of the work…should be foreseen as a relying on
financial information
• Blue Bell, Inc. v. Peat, Marwick, Mitchell & Co., 1986
• Texas Court of Appeals held that if an accountant preparing
audited statements knows or should know…the accountant may
be held liable for negligent misrepresentation
Reasonably Foreseeable Third Parties
• H. Rosenblum v. Adler, 1983

• New Jersey Supreme Court ruled that auditors should be liable to all
reasonably foreseeable third parties who rely on the financial statements
• “Independent auditors have a duty of care to all persons whom the auditor
should reasonably foresee as recipients of the statements from the
company for proper business purposes, provided the recipients rely on
those … statements.”
• Citizens State Bank v. Timm, Schmidt & Company
• Wisconsin Court ruled the cost of credit to lenders would be prohibitive if
foreseeable third parties could not sue auditors
• Bily v. Arthur Young, 1992
• California Supreme Court case that rejected Rosenblum foreseeability
approach
• The foreseeability rule exposes auditors to potential liability in excess of
their proportionate share
• Murphy v. BDO Seidman, LLP
• California Court of Appeals ruled “Grapevine plaintiffs” – indirect reliance
based on what others told them – had legal claims for ordinary negligence
against auditors
• Seems to stretch auditors legal liability beyond reasonable bounds
Liability for Fraud
• Gross negligence may be interpreted as

fraud
• Gross negligence, or constructive fraud,
occurs when the auditor acts so carelessly
in the application of professional standards
that it implies a reckless disregard for the
standards of due care
• Fraudulent intent or scienter
• Scienter is the intent to deceive, manipulate,
or defraud
1136 Tenants Case
• 1136 Tenants Corp. v. Max Rothenberg & Co., 1967

• Accounting firm was sued for negligent failure to discover an
embezzlement by the managing agent who had hired the firm to
write up (compile, no auditing procedures performed) the books
• Court found an engagement to audit and entered a judgment of
$237,000 for a $600 compilation engagement
• Affected auditing standards:
• Engagement letter was developed to formalize the
responsibilities of accountants and auditors in performing
professional services
• Accounting and Review Services Committee (AICPA)
formed to formulate standards for review and compilation
services and define assurance level
• A review provides limited assurance that the financial statements
are free of material misstatements
• A compilation provides no assurance and services are of a
bookkeeping nature
Plaintiff Claims for Action
• Common-law liability for fraud is available to

third parties in any jurisdiction. The plaintiff
must prove:
• A false representation by the accountant
• Knowledge or belief by the accountant that the
representation was false
• The accountant had fraudulent intent or scienter
(established by proof that accountant acted with
knowledge of the false representation)
• The third party relied on the false representation
• The third party suffered damages
Plaintiff Claims Court Cases
• State Street Trust Co. v. Ernst

• Auditors informed client that receivables were overstated in the audited
statements but did not inform State Street Trust, when the auditors knew
that State Street Trust was making a loan based on the audited
financials
• New York court ruled the auditor’s actions appeared to be grossly
negligent and that “reckless disregard of consequences may take the
place of deliberate intention”
• Phar-Mor v. Coopers & Lybrand
• The auditors were found guilty of fraud under both common and
statutory law, even though the auditors had no intent to deceive
• Plaintiffs successfully argued reckless disregard for the truth (gross
negligence or constructive fraud) gives rise to an inference of fraud
• Plaintiffs who lack privity or are not foreseen third parties can sue the
auditor for fraud, and need only prove gross negligence by the auditors
• Houbigant, Inc. v. Deloitte & Touche LLP and Reisman v. KPMG
Peat Marwick LLP
• For an auditor to be guilty of fraud, the plaintiffs must prove that the
auditor was aware that its misrepresentations might reasonably be relied
upon by the plaintiff
Auditor Defenses for Fraud Claims
• Auditor must prove

• Auditor didn’t have duty to the third party
• The third party was negligent
• Auditor’s work was performed in accordance with professional
standards
• The third party did not suffer loss
• Any loss to the third party was caused by other events
• The claim is invalid because the statute of limitations has
expired
• Strengthened defense available to auditors
• Grant Thornton LLP v. Prospect High Income Fund, et al
• Ruling set new limitations on “holder” claims, wherein
investors contend that they were put at a disadvantage
because they held securities based on an auditor’s report that
they otherwise would have sold
• Texas Supreme Court ruled that the law does not impose on
auditors an obligation to provide an accurate accounting to
anyone who reads and relies on an audit report
Statutory Liability
Willful Violation
• Statutory liabilities may lead to convictions

for crimes, provided their conduct was
“willful”
• U.S. v. Peltz
• 1970 court case held that the prosecution had to
establish “a realization on the defendant’s part that he
was doing a wrongful act”
• U.S. v. Schwartz
• 1972 court case held willfully violating a provision of
the Exchange Act would be sustained upon
“satisfactory proof… that the defendant intended to
commit the act prohibited”
Securities Act of 1933
• Regulates the initial offering of securities

through the mails or interstate commerce
• Companies must file registration statements,
(S-1, S-2, and S-3 forms) and prospectuses
which contain financial statements that have
been audited by an independent CPA
• Accountants who assist in the preparation of
the registration statement are civilly liable if the
registration statement
• Contains untrue statements of material facts
• Omits material facts required by statute or regulation
• Omits information that if not given makes the facts
stated misleading
Section 11 of the 1933 Securities Act
• Imposes a liability on issuer companies and others, including

auditors, for losses suffered by 3rd parties when false or
misleading information included in a registration statement
• Any purchaser may sue and must prove
• The specific security was offered through the registration statement
• Damages were incurred
• Material misstatement or omission in statement
• Plaintiff need not prove reliance on the statements unless
purchase took place after one year of the offering
• If 2 and 3 above are proven, it is prima facie (sufficient to win
unless rebutted) and shifts the burden of proof to the accountant
• Auditor can use
• Materiality defense
• Due diligence defense
• Knowledge of falsehood defense
• Lack of causation defense
Key Court Decisions
1933 Securities Act
• Escott v. Bar Chris Construction Corp., 1968

• Auditors’ failure to perform a reasonable
investigation of subsequent events did not
satisfy section 11(b)
• Bernstein v. Crazy Eddie, Inc

• Auditor was unable to prove that they had
exercised appropriate due professional care
Securities Exchange Act of 1934
• Regulates subsequent trading and ongoing reporting of

securities sold on national stock exchanges
• Entities having total assets of $10 million or more and
500 or more stockholders are required to register under
the Securities Exchange Act
• Requires ongoing filing
• Reviewed quarterly filing (10-Q)
• Audited annual reports (10-K)
• Form 8-K whenever a significant event takes place affecting
the entity
• Authoritative literature for information filed with the SEC
• Financial Reporting Releases (FRRs)
• Staff Accounting Bulletins (SABs)
• Interpretations of Regulations S-X and S-K
Section 18 of the Securities Exchange Act
of 1934
• Imposes liability on any person who makes

a material false or misleading statement in
documents filed with the SEC
• The auditor’s liability can be limited if the
auditor can show that she “acted in good
faith and had no knowledge that such
statement was false or misleading”
• Number of court cases have limited the
auditor’s good-faith defense when the
auditor’s action has been judged to be
grossly negligent
Section 10 and Rule 10b-5
Securities Exchange Act of 1934
• Unlawful for a CPA to:

• Employ any device, scheme, or artifice to defraud
• Make an untrue statement of material fact or omit a
material fact
• Engage in any act, practice, or course of business to
commit fraud or deceit in connection with the trading of
the stock
• Rule 10b-5 of the Securities Exchange Act of 1934
• Plaintiff must prove:
• A material, factual misrepresentation or omission
• Reliance by plaintiff on the financial statement
• Maxwell v. KPMG LLP : Maxwell’s harm wasn’t caused by
KPMG’s audit
• Damages suffered as a result of reliance on the financial
statements
• Intent to deceive, manipulate or defraud (scienter)
Ernst & Ernst v. Hochfelder, 1976
• Hochfelder was enticed to invest in accounts

that were represented to yield a high rate of
return
• The investment was fraudulent and the
brokerage firm went bankrupt
• Hochfelder’s cause of action was Ernst failed to
utilize appropriate auditing procedures in its
audit
• U. S. Supreme Court ruled that Section 10 was
intended to prohibit a type of conduct quite
different from negligence
• The term manipulative connotes intentional or willful
conduct designed to deceive or defraud investors
Court Decisions and Auditing Procedures
• U.S. v. McKesson & Robbins, 1939

• 1st case auditing practices were subject to significant public scrutiny
• Coster(CEO) and brothers had elaborate scheme to steal $2.9 M in
cash over 12 years
• PwC failed to detect $19 M in phony inventory and accounts receivable
• Physical observation of inventory and direct confirmation of accounts
receivable became GAAS audit procedures
• Equity Funding
• Inflated its earnings by recording fictitious commissions
• Borrowed funds recorded as payments on the loan receivable
• Abused information technology to falsify accounting data and hide the
fraud
• Created over $2B fictitious insurance policies and death claims on them
• Created policy files – the forgery party
• Opened auditor’s briefcase: took and read audit plan in order to
anticipate next steps
• Sent confirmations to employees to fill out for the fictitious policyholders
• Auditors at Equity Funding compromised independence through
salaries, given shares, and received loans from Equity Funding
Private Securities Litigation Reform Act
(PSLRA)
• Amends the Securities Exchange Act of 1934 by adding Section
10A, “Audit Requirements”
• Auditor must include “Procedures designed to provide reasonable
assurance of detecting illegal acts that would have a direct and material
effect on the determination of financial statement amounts”
• Auditor’s responsibility to detect fraud and requires auditors to promptly
notify the audit committee and board of directors of illegal acts
• Particularity Standard
• Goal to harmonize holdings of courts that led to varying standards of
auditor legal liability
• Allows scienter to be pled through “particularized” allegations
establishing either
• Strong circumstantial evidence of conscious misbehavior or recklessness, or
• Facts showing that the defendant had both the motive and opportunity to commit
securities fraud
• Defined the concept of “motive”
• Allege facts demonstrating a “concrete and personal benefit” that would be
realized from the fraud
• Keeping the stock prices high or other motives possessed by most corporate
insiders are insufficient evidence
Proportionate Liability -PSLRA
• Attempts to reform auditor liability because tort

liability was out of control
• Drops legal standards of joint-and-several liability
and adopts proportionate liability for all non-
knowing securities violations under the Exchange
Acts
• A party is liable only for that proportion of damages
for which she is responsible
• Only those who committed "knowing" securities
fraud will suffer joint and several liability
• Telltabs, Inc. v. Makor Issues and Rights, plaintiffs
did not meet the “strong inference” standard, and
were too vague to establish a “strong inference” of
scienter
SOX and Auditor Legal Liabilities Section 404.
Internal Control over Financial Reporting
• SOX passed to increase the transparency of financial reporting by

enhancing corporate disclosure and to foster an ethical climate
• SOX increases auditor liability to third parties by specifying or expanding
the scope of third parties to whom an auditor owes a duty of care
• SOX requires accounting firms to review and assess management’s
report on internal controls and issue its own report
• Monroe v. Hughes, 1994 – the auditor found internal control
irregularities, consulted with management, expanded scope but did not
disclose, but the court did not agree
• PCAOB Auditing Standard No. 5 – imposes duties on auditors to
disclose and explain in their reports material control weaknesses and
their effect on the overall audit process. (e.g., auditors must plan their
audit to detect all material weaknesses in the client’s control structure
and operational effectiveness)
• Failing to disclose detected material weaknesses exposes auditors to
Section 11 liability
• PCAOB inspections to date have shown that auditors’ opinions on
internal controls are inadequate in many cases
SOX and Auditor Legal Liabilities Section 302.
Corporate Responsibility over Financial Reporting
• Section 302 requires the certification of periodic reports

filed with the SEC by the CEO and CFO that the report
does not contain any untrue statement of a material fact or
omit a material fact necessary to make the statements not
misleading
• Higginbotham v. Baxter Int’l, the court ruled that claims of
scienter require more than just an assertion; specific proof
of such knowledge must exist
• In re Lattice Semiconductor Corp, the court ruled that 302
certifications did give rise to inference of scienter due to
either knowing about improper journal entries and
misstating financial statements or knowing that controls
were inadequate
• In re WatchGuard Secs Litig., the court held that the
individual defendants’ 302 certifications were, by
themselves, inadequate to support a strong inference of
scienter
Perspective on Accomplishments of SOX
• SOX sometimes faulted for financial crisis

and great recession of 2007-08
• Defenders say it wasn’t designed to do
more than insure that accounting rules were
followed
• SOX did mitigate the force of the financial
crisis
• It may be that the government will not be
successful in controlling fraud, because you
cannot legislate ethics
FCPA
• Establishes standards of acceptability of payments

(facilitating/bribes) made by U. S. multinational entities to foreign
government officials
• Lockheed and Japanese Premier Tanaka
• Applies to
• All U. S. firms, public or private
• Foreign companies filing with SEC
• Department of Justice oversees criminal and civil enforcement
• SEC oversees civil enforcement with respect to registrants
• Corporation may be fined up to $1M and cannot indemnify
officers
• Officers may be
• Fined up to $10,000, imprisoned up to 5 years or both
• FCPA does not prohibit “facilitating” grease payments
• SEC Charges Pfizer with FCPA Violations
Difference between Facilitating Payments
and Bribe
• Under the Foreign Corrupt Practices Act

(FCPA)
• a bribe is money or a gift given to someone to
change their behavior and perform an act or service
that is not part of their legal or authorized activities
• a facilitation fee is a payment made to speed up
(or queue jump) the process of a task that is within a
person’s normal range of authorized activities
• These payments may still be illegal for the person to
receive even though they may be an acceptable part of
the culture in the country
• The facilitating payments are like tipping a maître d to
get a better table at a restaurant
Internal Accounting Control Requirements
• FCPA makes all SEC registrants maintain adequate books

and to have controls to ensure all transactions are
approved by management and recorded properly
• SEC’s case against Oracle Corporation (2012) is most
significant case for books, records, and internal control
violations
• Oracle secretly “parked” a portion of the proceeds of sales to the
Indian government between 2005 and 2007
• Oracle failed to maintain a system of effective internal controls
to prevent improper side funds
• Summary of DOJ and SEC enforcement actions under
FCPA average 25 per year
• FCPA violations are troubling since if bribery occurs in a
company we can only wonder what other ethical transgressions
exist
• Violations reflect a failure of the corporate governance system
and unethical tone at the top
• How can auditors miss FCPA violations?
Regulatory and Professional Issues:
An International Perspective
• Major financial statement frauds in the early 2000s

that led to legal liabilities for the auditors; the blame
for these frauds is due to a lack of internal controls,
ineffective internal audits, inattentive boards of
directors, and external audit failures
• IFAC’s research report identifies several key
weaknesses in corporate governance with
recommendation for more effective corporate ethics
codes as well as the provision of training and
support for individuals in the organizations to better
prepare them to deal with ethical dilemmas
• IFAC considers the “public interest” to represent the
common benefits derived by stakeholders (i.e.,
investors and creditors) of the accounting
profession through sound financial reporting
The Influence of Culture on International
Financial Reporting
• Research reveals that two accounting values

directly influenced by national culture are
conservatism and secrecy, which affect the
measurement and disclosure of financial
information in financial reports and have the
greatest potential to affect cross-border
financial statement comparability
• The widely recognized accounting values that
can be used to define a company’s cultural
foundation with respect to financial reporting:
• Professionalism versus statutory control
• Uniformity versus flexibility
• Conservatism versus optimism
• Secrecy versus transparency
International Financial Reporting Standards
(IFRS)
• More than 120 countries currently use IFRS in one form or

another
• In 2005 the European Union adopted IFRS for all
companies doing business the European Zone
• The U.S. has been reluctant to adopt IRFS; current
approach is “condorsement,” which would address
differences between IFRS and U.S. GAAP to determine
acceptability of IFRS as part of GAAP
• The principles-based approach of IFRS has increasingly
influenced standards in the U.S., although the rules-based
system is still the basic framework for financial reporting
• The effectiveness of IFRS adoption may be hampered by
differences, across countries, which highlights the need for
a common set of ethical standards to deal with differences
• International enforcement remain problematic given legal
differences and cultural considerations
Principles versus Rules-Based Standards
• Principles-only standards may present enforcement

difficulties because they provide little guidance or
structure for exercising professional judgment by
preparers and auditors
• SEC study recommends that those involved in the
standard-setting process more consistently develop
standards on a principles-based or objectives-based
basis
• Rules-based standards can provide a basis for
avoidance of the accounting objectives inherent in the
standards
• Internal inconsistencies, exceptions, and bright-line tests
reward those willing to engineer their way around the intent
of standards
• This can result in financial reporting that is not
representationally faithful to the underlying economic
substance of transactions and events
Judgment and “True and Fair View”
standard
• A principles-only approach typically provides

insufficient guidance to make the standards reliably
operationally
• This requires preparers and auditors to exercise
significant judgment in applying overly broad standards to
more specific transactions and events, and does not
provide a sufficient structure to frame the judgment
• The result can be significant loss of comparability among
reporting entities
• The audit report in most countries that have
adopted IFRS use the “true and fair view” in lieu of
the U.S. “present fairly”
• A true and fair view relies on the notion of placing the
economic substance of a transaction ahead of its legal
form and mirrors a principles-based approach to decision-
making
Compliance and Ethical Issues
• Trevino et al. study on legal compliance programs

• Found that legal compliance programs are helped by
consistency between policies and actions with the
ethical climate such as ethical leadership, fair treatment
of employees, and open discussion of ethics
• Found that legal compliance programs are hurt by an
ethical culture that emphasizes self-interest,
unquestioning obedience to authority, and perception
that legal compliance program exists only to protect top
management
• Collins found that companies that transformed from
good solid businesses into great companies had “Level
5” leadership who were people of integrity and
conscience who put the interest of the stockholder and
employees ahead of own self-interest
Compliance and Ethical Issues: Part 2
• Kirk Hanson of Markkula Center for Applied Ethics

at Santa Clara University finds
• Compliance mentality is focused on meeting the minimum
standards and exact wording of a code of ethics rather
than the true meaning and purpose of the code
• Thus, codes can result in a formal “compliance but not
real change in decisions that the company makes”
• Companies have adopted one of two general strategies –
compliance or management by values
• Compliance approach: company pledges and works to meet
standards of local law for each nation and region and has
encountered significant difficulties
• Management by values approach: can lead to a more
successful program but is harder to implement
• The problem of a compliance approach to global
standards can lead to ethical legalism
Global Ethics
• International Ethics Standards Board for Accountants (IESBA)

develops and issues high-quality ethical standards for
professional accountants around the world
• Issued a global code of ethics (IFAC Code)
• A member body or firm from a member country may not apply less
stringent standards than those stated in the IFAC Code
• If national law or regulation prohibits or is in conflict with the IFAC Code,
them member body or firm should be governed by their country’s
requirements but comply with all other parts of the IFAC Code
• IFAC Code contains provisions virtually identical to those
embodied in the AICPA Code of Professional Conduct
• Act in accordance with the public interest
• Identify threats to independence and develop safeguards to mitigate
such threats
• Be independent in fact
• Maintain the appearance of independence
• Adhere to standards related to integrity, objectivity, professional
competence and due care, confidentiality, and professional behavior
Global Fraud
• Seventh annual Global Fraud Survey prepared by Kroll

found
• Fraud is on the rise (after a decrease in 2012) and so are
costs involved in managing fraud
• Awareness of fraud is up
• Cybercrime
• Information theft
• Outsourcing or expansion into new or riskier markets
• Measures to guard against fraud are constrained by budgets
and corporate policy
• Fraud is an inside job: with 32% experiencing fraud by senior
or middle management, 42% by junior employee, and 23%
by an agent or intermediary
• Global Fraud Survey findings were compared with
Transparency International’s Corruption Perceptions
Index (CPI) – fraud and corruption frequently go hand in
hand
Global Bribery
• Corruption is part of some country’s culture so that fraud, bribery, and

kickbacks are a way of doing business
• Facilitation payments
• “Grease payments” (U.S.)
• “Baksheesh” (Middle East)
• “Mordida” (Latin America)
• “Ghoos” (India)
• Above facilitation payments are not intended to influence outcome, only
the timing
• One of the few exceptions from anti-bribery prohibitions of the U.S. FCPA
• UK Bribery Act bans facilitating payments
• Act includes a new corporate criminal offense of failure to prevent bribery
• Over ½ of all corruption incidents identified from “tips” when whistle-
blowing hotline is available
• Preventing corruption is fundamentally a matter of corporate culture
• Assess the way things really happen in the company
U.K. Bribery Act
• Serious Frauds Office (SFO) in the UK provides

guidance on corruption indicators, red flags, and
questionable business practices:
• Abnormal cash payments
• Pressure exerted for payments made urgently or ahead of
schedule
• Payments being made through a third party country
• Private meetings with public contractors
• Lavish gifts
• Agreeing to contracts not favorable to the organization
• Unexplained preference for certain contractors
• U.K. Bribery Act applies to all U.K. companies and
subsidiaries, a briber associated with U.K.
companies and foreign corporations who carry on a
business or part of a business in the U.K.
PCAOB Inspections of Chinese Companies
• Cultural factors impede the ability of PCAOB or the SEC to

gain access to sensitive audit information related to the
examination of Chinese companies listed on U.S. stock
exchanges
• The lack of transparency serves as a proxy for international
enforcement
• Chinese authorities seem less than fully committed to getting
to the bottom of fraud and scandals if the victims are
American, Canadian, or other foreign investors
• The Chinese government will share audit work papers only if
those papers are not used in an enforcement proceeding
without Chinese permission
• Chinese government is the major stockholder in many public
Chinese companies
• From ethical perspective, it is an issue of trust and
representational faithfulness in the financial reporting
Concluding Thoughts
• The history of litigation against auditors show that due

care and the exercise of professional skepticism are the
underpinnings of an audit performed in accordance with
prescribed standards
• The ethical standards, professionalism, and practices
embedded in the culture of auditors and audit firm will
protect them in difficult situations and conflicts with
management over accounting and financial reporting
issues
• Ethical standards require that global companies must go
beyond simple compliance with laws as laws can never
address all situations
• Companies without good ethics are far more likely to fail
because they fail to nurture an environment of honesty,
trustworthiness, responsibility, accountability, and
integrity

Chapter 6 4e UPDATED

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Chapter 6 4e UPDATED

Загружено:

Авторское право:

Доступные форматы

Legal, Regulatory, and

• PwC audits of failed investment company MF

• What is the link between professional ethics

• Zoe-Vonna Palmrose identifies the 4 general

• Auditor must perform professional services with

• A contractual obligation to the client that creates a privity

• Near privity relationship established in Credit

• “Middle ground” approach followed by most states

• H. Rosenblum v. Adler, 1983

• Gross negligence may be interpreted as

• 1136 Tenants Corp. v. Max Rothenberg & Co., 1967

• Common-law liability for fraud is available to

• State Street Trust Co. v. Ernst

• Auditor must prove

• Statutory liabilities may lead to convictions

• Regulates the initial offering of securities

• Imposes a liability on issuer companies and others, including

• Escott v. Bar Chris Construction Corp., 1968

• Bernstein v. Crazy Eddie, Inc

• Regulates subsequent trading and ongoing reporting of

• Imposes liability on any person who makes

• Unlawful for a CPA to:

• Hochfelder was enticed to invest in accounts

• U.S. v. McKesson & Robbins, 1939

• Attempts to reform auditor liability because tort

• SOX passed to increase the transparency of financial reporting by

• Section 302 requires the certification of periodic reports

• SOX sometimes faulted for financial crisis

• Establishes standards of acceptability of payments

• Under the Foreign Corrupt Practices Act

• FCPA makes all SEC registrants maintain adequate books

• Major financial statement frauds in the early 2000s

• Research reveals that two accounting values

• More than 120 countries currently use IFRS in one form or

• Principles-only standards may present enforcement

• A principles-only approach typically provides

• Trevino et al. study on legal compliance programs

• Kirk Hanson of Markkula Center for Applied Ethics

• International Ethics Standards Board for Accountants (IESBA)

• Seventh annual Global Fraud Survey prepared by Kroll

• Corruption is part of some country’s culture so that fraud, bribery, and

• Serious Frauds Office (SFO) in the UK provides

• Cultural factors impede the ability of PCAOB or the SEC to

• The history of litigation against auditors show that due

Вам также может понравиться