Legal Liabilities for CPA and auditors

1) the occurrence of events that result in losses for users of the financial statements,

(2) the investigation by plaintiff attorneys before filing, to link the user losses with allegations of material omissions or Page 342misstatements of financial statements,

(3) the legal process, which commences with the filing of the lawsuit, and (

4) the final resolution of the dispute.

The first stage comes about as a result of some loss-generating event, including client bankruptcy, fraudulent financial reporting, and the misappropriation of assets.

The term willful and its application in criminal securities law cases often is influenced by the context of the situation. Section 32(a) of the Securities Exchange Act of 1934 provides that any person who willfully violates any provision of the Act can be charged with a crime, while Section 15(b)(4) authorizes the SEC to seek civil administrative penalties against any person who willfully violates certain provisions of the securities laws.

he term material describes the kind of information that an average prudent investor would want to have so that he can make an intelligent, informed decision whether or not to buy the security.

Traditionally, because auditors had no duty to disclose control weaknesses or their effects on substantive audit testing in the audit report, courts deemed control irregularities immaterial for deciding auditors liability under Section 11 of the Securities Exchange Act of 1933. The case of Monroe v. Hughes (1991) illustrates the current law.^{62 (Links to an external site.)} In that case, the auditor found internal control irregularities, conferred with management and expanded the scope of its nancial audit by performing more elaborate substantive testing.

Answer the following for discussion purposes:

1. Do you think that the provision of nonaudit services for a client with a failed audit is evidence of negligence? Explain.