reg 5.4
DESCRIPTION
REG 5.4TRANSCRIPT
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breach is material, CPA no Payment
defenses - Client failure to cooperate
Duty of care M Misrepresentation of material fact; M Misrepresentation of material fact;
Breach of that Duty S Intent to deceive (Scienter) R Recklessly
Caused Injury A A
Damages
I I
To Whom duty is owed
D Damages D Damages
Any person
Limited foreseeable Class of Persons
Ultramares Decision
*Privity
CPA Client
3rd part ( Named ) beneficiaries
CPA fails to act with reasonable care
*interstate commerc
L Suffered a loss L
A Acquired the stock Defenses available to auditors: 1933 1934 A
M M
1. Audit was performed with due Care Yes Yes
2. Misstatement was immaterial Yes Yes
3. Plaintiff had prior knowledge of misstatement Yes Yes
4. Plaintiff did not rely on information No Yes
5. Misstatement was not cause of loss Yes Yes
Plaintiff need not prove
Intent
Negligence
Reliance
Suffered a loss
Acquired the stock
Note The plaintiff justifiably relied on
the misrepresentation
F
R
A
U
D
Financial statement contained a
material misrepresentation or
material omission of fact
The misrepresentation was
made with scienter
Use of some means of
interstate commerce (e.g.,
telephone, Internet, mail, etc.).
Violation of StatuteLiability under 33 Act
LAM
Financial statement
contained a material
misrepresentation or
Liability under 34 Act
LAM + Fraud
CPA is to perform with the same skill and care
expected of ordinarily prudent
CPA followed applicable standards for the profession (
Eg GAAP & GAAS )
Following GAAS or GAAP is not an absolute defense
*Privity - only a party to the contract
can sue
CPA breaches the contract, the client or
third party beneficiary is entitled to
recover compensatory damages
Actual and justifiable reliance by plaintiff
on the misrepresentation
An intent to induce plaintiffs reliance on
the misrepresentation
MAIDR
Actual and justifiable reliance by
plaintiff on the
An intent to induce plaintiffs
reliance on the
* makes a statement without knowing
whether it is true or false
* makes a statement knowing the
statement was false
Liability under 33 Act Liability under 34 Act
Majority Rule
Elements
Minority Rule
Breach ( Ordinary Negligence )
Elements MAIDS Elements
Breach Of Contract Commision of Fraud Violation of Statute
CPA Legal Liabilities
Negligence Fraud
Construtive Fraud
(Gross Negligence)
Private Securities
Litigation Reform Act
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it is a crime Accountant is prohibited from showing the workpapers to anyone
without theclient's permission
Exception
Generally No State Privilege
Subpoenaed
CPA society voluntary quality control review
Defend a lawsuit brought by a client
Official investigation of the AICPAIstate trial board
GAAP/GAAS requires disclosure
Shown to a prospective purchaser of the
CPA's practice, & does not disclose the
confidential information; Note that while a
CPA may allow a prospective purchaser to
review confidential workpapers, the CPA
may not
Sarbanes-Oxley Act
To knowingly alter, destroy, falsify, a
document with the intent to impede a
federal investigation
keep all workpapers - public company
for at least 7 Yes
Defraud (Knowing commite Fraud) the
public in connection with a registered
security
Privileges
Generally No Accountant-
Client Privilege under
Federal Law
Exception : state courts and
agencies have no power to
force
Workpapers
REG 5.4.1.pdfREG 5.4.2.pdf