Lecture Principles of auditing and other assurance services (15/e) - Chapter 4: Legal liability of auditors. This chapter described the legal environment of auditors, emphasizing legal liability under both common law and statutory law. | Legal Liability of Auditors Chapter 4 1 Primary Sources of CPA Liability Breach of Contract Negligence Ordinary Gross Fraud Statutory Securities Act of 1933 Securities Exchange Act of 1934 Other—Criminal and RICO 4- Elements of Proof by Client Under Common Law Duty—CPAs accepted a duty of due professional care Breach of duty—CPAs breached that duty Losses—Suffered by plaintiff Causation (proximate cause)—Losses were caused by CPAs’ performance 4- Approaches to Auditor Common Law Liability to Third Parties 4- 2 2 Ultramares Approach to Auditor Liability Selected Cases Ultramares Corporation v. Touche (1931)--A landmark case under common law in that it established that auditors could be held liable to third-party beneficiaries for ordinary negligence and to other third parties for gross negligence. Credit Alliance Corp. v. Arthur Andersen & Co. (1985)--A common-law decision establishing that auditors must demonstrate knowledge of reliance on the financial statements by a . | Legal Liability of Auditors Chapter 4 1 Primary Sources of CPA Liability Breach of Contract Negligence Ordinary Gross Fraud Statutory Securities Act of 1933 Securities Exchange Act of 1934 Other—Criminal and RICO 4- Elements of Proof by Client Under Common Law Duty—CPAs accepted a duty of due professional care Breach of duty—CPAs breached that duty Losses—Suffered by plaintiff Causation (proximate cause)—Losses were caused by CPAs’ performance 4- Approaches to Auditor Common Law Liability to Third Parties 4- 2 2 Ultramares Approach to Auditor Liability Selected Cases Ultramares Corporation v. Touche (1931)--A landmark case under common law in that it established that auditors could be held liable to third-party beneficiaries for ordinary negligence and to other third parties for gross negligence. Credit Alliance Corp. v. Arthur Andersen & Co. (1985)--A common-law decision establishing that auditors must demonstrate knowledge of reliance on the financial statements by a third party for a particular purpose to be held liable for ordinary negligence to that party. Observation Auditors must have been aware that the financial statements were to be used for a particular purpose by a known third party to be liable to that party for ordinary negligence. 4- 3 3 Restatement of Torts Approach to Auditor Liability Selected Case Rusch Factors, Inc. v. Levin (1986)--A common-law decision in which the auditors were found liable for ordinary negligence to a third party not specifically identified to the auditors, although the auditors were aware of the intended use of the financial statements. Observation To be held liable for ordinary negligence, the auditors must have been aware that the financial statements were to be used for a particular purpose, although the identity of the third party need not necessarily be known. 4- 4 4 Rosenblum Approach to Auditor Liability Selected Case Rosenblum v. Adler (1983)--Established that the auditors could be held liable .
