The main goals of this chapter are to: Understand the four general stages in an audit related legal dispute, know the definitions of key legal terms, know the auditor's liability to clients under common law, understand the auditor's liability to third parties under common law,. | Chapter 20 Legal Liability McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Historical Perspective 1970 Claims against auditors were relatively uncommon before the 1970’s. 1990 1980 Due to a slump in the economy in the early 1970’s and the recession of the 1980’s, it became more common for auditors to be sued. The recession of 1990-1992 led to another upsurge in litigation against auditors. 2002 Due to several high-profile frauds, Congress refocused attention on auditors in the Sarbanes-Oxley Act of 2002. Intro 2010 Global credit crisis leads to the Dodd-Frank Act of 2010 and increases scrutiny into auditing profession again. 20- Overview Two Classes of Law Common Law Case law developed over time by judges Statutory Law Written law enacted by the legislative branch of government LO# 2 20- Common Law—Clients Requires Due Care Types of Liability to the Client May be held liable for breach of contract Negligence Gross negligence Fraud (acting with knowledge and intent to deceive) LO# 3 20- Common Law—Third Parties Near Privity 3rd parties whose relationship with the CPA approaches privity. Foreseen 3rd Parties 3rd parties whose reliance should be foreseen, even if the specific person is unknown to the auditor. Reasonably Foreseeable 3rd Parties 3rd parties whose reliance should be reasonably foreseeable, even if the specific person is unknown to the auditor. LO# 4 20- LO# 4 20- Fraud Third Party Must Prove A false representation by the CPA. Knowledge or belief by the CPA that the representation was false. The CPA intended to induce the 3rd party to rely on the false representation. The 3rd party relied on the false representation. The 3rd party suffered damages. LO# 4 20- Statutory Liability The Securities Act of 1933 The Securities Exchange Act of 1934 Three major statutes provide sources of statutory liability for auditors: Sarbanes-Oxley Act of 2002 LO# 5 20- Securities Act of 1933 Third Party . | Chapter 20 Legal Liability McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Historical Perspective 1970 Claims against auditors were relatively uncommon before the 1970’s. 1990 1980 Due to a slump in the economy in the early 1970’s and the recession of the 1980’s, it became more common for auditors to be sued. The recession of 1990-1992 led to another upsurge in litigation against auditors. 2002 Due to several high-profile frauds, Congress refocused attention on auditors in the Sarbanes-Oxley Act of 2002. Intro 2010 Global credit crisis leads to the Dodd-Frank Act of 2010 and increases scrutiny into auditing profession again. 20- Overview Two Classes of Law Common Law Case law developed over time by judges Statutory Law Written law enacted by the legislative branch of government LO# 2 20- Common Law—Clients Requires Due Care Types of Liability to the Client May be held liable for breach of contract Negligence Gross negligence Fraud .
