Business Law Chapter 51

Front 1

Unqualified opinion

Back 1

Represents an auditor's finding that the company's financial statements fairly represent the company's financial position, the results of its operations, and the change in cash flows for the period then ended in conformity with GAAP.

Front 2

Qualified opinion

Back 2

States financial statements are fairly stated except for a departure from GAAP a change in accounting principles, or a material uncertainty. The exception, departure, or uncertainty is noted in the audit opinion.

Front 3

Adverse opinion

Back 3

Determines that the financial statements do not fairly represent the companys financial position, results of operations, or change in cash flows in conformity with GAAP. This type of opinion is usually issued when an auditor determines that a company has materially misstated certain items on financials.

Front 4

Disclaimer of opinion

Back 4

Expresses auditor's inability to draw a conclusion about the accuracy of the company's financial records. This opinion is generally issued when the auditor lacks sufficient info about the financial records to issue an overall opinion

Front 5

Limited liability partnership

Back 5

Most CPA's are organized as LLP's. In this form of partnership, all the partners are limited partners who lose only their capital contributions if the LLP fails. The limited partners are not personally responsible for the debts and obligations of the LLP. A LLP whose negligent or intentional conduct causes in jury is personally liable for their own conduct.

Front 6

Engagement

Back 6

a formal entrance into a contract between a client and an accountant

Front 7

Breach of contract

Back 7

terms of engagement are specified when an accountant and a client enter into a contract. An accountant who fails to perform may be sued for damages caused by the breach of contract. Generally courts consider damages to be the expenses the client incurs in securing another accountant to perform the needed services as well as any fines or penalties incurred by the client for missed deadlines, lost opportunities, and such.

Front 8

Fraud

Back 8

when an accountant has been found liable for actual or constructive fraud, the client may bring a civil lawsuit and recover any damages proximately caused by that fraud. Punitive damages may be awarded in cases of actual fraud.

Front 9

Actual fraud

Back 9

Intentional misrepresentation or omission of a material fact that is relied on by the client and causes the client damage. Such cases are rare.

Front 10

Constructive fraud

Back 10

Occurs when an accountant acts with "reckless disregard" for the truth or the consequences of his or her actions. This type of fraud is sometimes categorized as gross negligence

Front 11

Negligence

Back 11

Accountants owe a duty to use reasonable care, knowledge, skill, and judgment when providing auditing and other accounting services to a client. In other words, an accountant's actions are measured against those of a "reasonable accountant" in similar circumstances. The develpment of GAAP, GAAs and other uniform accounting standards has generally made this a national standard. An accountant who fails to meet this standard may be sued for negligence

Front 12

Unaudited financial statements

Back 12

Accountants can also be held liable for their negligence in preparing unaudited financial statements. If an audit turns up a suspicious transaction or entry, the accountant is under a duty to investigate it and inform the client of the results of the investigation.

Front 13

Ultramares doctrine

Back 13

A rule which says that an accountant is liable only for negligence to third parties who are in privity of contract or in privity-like relationship with the accountant. It provides a narrow standard for holding accountants liable to third parties for negligence.

Front 14

When does privity of contract relationship occur?

Back 14

When a client is employs an accountant to prepare financial statements to be used by a 3rd party. For example 1. client employs accountant to prepare audited financials for the client to obtain a bank loan. 2. The accountant is made aware of this special purpose, the accountant is liable for any damages incurred by the bank because of a negligently prepared report.

Front 15

Section 522 of restatement of torts

Back 15

A rule which says an accountant is liable only for negligence to third parties who are members of a limited class of intended users of the client's financial statements. It provides a broader standard for holding accountants liable than does the Ultramares doctrine.

Front 16

How does Section 522 differ from ultramares

Back 16

Under restatement liable for negligence to any memeber of liimted intended users for whose benefit the accountant has been employed to prepare the client's financial staements or to whom the accountant knows the client will supply copies of the financial statements. In other words, the accountant does not have to know the specific name of the third party.

Front 17

Foreseeability standard

Back 17

A rule which says that an accountant is liable for negligence to third parties who are foreseeable users of the client's financial statements. It provides the broadest standard of liability

Front 18

What does liability depend on in the foreseeability standard

Back 18

doesn't depend on accountant's knowledge of the identity of either user or intended user

Front 19

Fraud

Back 19

If an accountant engages in actual or constructive fraud, a third party who relies on the accountant's fraud and is injured thereby may bring a tort action against the accountant to recover damages. Salvo hires CPA to do the audit and the CPA falsifies the financial position of the company. Bank extends the loan to Salvo and the loan is not repaid. Bank can recover losses from accountant who committed the fraud.

Front 20

Breach of contract

Back 20

Third parties cannot usually sue accountants for breach of contract because the third parties are merely incidental beneficiaries who do not acquire any rights under the accountant-client contract. THey are not in privity of contract with the accountants.

Front 21

Privity of contract

Back 21

The state of 2 specified parties being in contract

Front 22

Section 10A to the securities exchange act of 1934

Back 22

An accountant could uncover info about a client's illegal activities. Section 10A imposes duty on auditors to detect and report illegal acts committed by their clients.

Front 23

How is an illegal act defined by section 10A

Back 23

An act or omission that violates any law, or rule or regulation having the force of law.

Front 24

What are the 10A requirements?

Back 24

Unless an illegal act is inconsequential tha auditor must inform client's management and audit committee
If management fails to take timely and appropriate action to remdeiate auditor must report to BOD.
Once reported to BOD the BOD must inform the SEC within one business day. If they fail the auditor must notify the SEC the next business day.

Front 25

Section 11a

Back 25

A section of the Securities Act of 1933 that imposes civil liability on accountants and others for 1 making misstatements or omissions of material facts in a registration statement or 2 failing to find such misstatements or omissions

Front 26

Due diligence defense

Back 26

a defense that can be asserted to section 11. An accountant avoids liability if he or she had, after reasonable investigation, reasonable grounds to believe and did believe, that the statements were true and there was no omission of a material fact that would make the statements misleading.

Front 27

Section 11a conditions

Back 27

1. making misstatements or omissiions of material facts in a registration statement
2. FAiling to find such misstatements or omissions.

Front 28

Plaintiff may recover what?

Back 28

They may recover the difference between the price he or she paid for the security and the value of the security at the time of the lawsuit. The plaintiff does not have to prove that he relied on misstatement or omission. Privity is irrelevant.

Front 29

SEction 10 b

Back 29

A section of sec that prohibits manipulative or deceptive practice in connection with the purchase or sale of a security. Unlawful by use of interstate commerce to make misstatements or omissision of facts th or engage any act that would defraud or deceit any person in connection with the purchase or sale of any security

Front 30

section 18a

Back 30

A section that imposes civil liability on any person who makes false or misleading statements in any application, report, or document filed with the SEC.

Front 31

What are 2 ways a person can defeat imposition of liability under section 18a?

Back 31

Defendant can show they acted in good faith or they can show the plaintiff had knowledge of the false/misleading information when the sec was purchased/sold.

Front 32

Private securities litigation reform act

Back 32

Limits a defendant's liability to its proportionate degree of fault.
Imposes pleading and procedural requirements that make it more difficult to bring class action securities lawsuits.
Gives proportionate liability.

Front 33

SEction 21

Back 33

makes it a criminal offense for a person to
1. willfully make any untrue statement of material fact in a registration statement filed with the SEC.
2. Omit any material fact necessary to ensure that the statements made in the registration statement are not misleading
or 3. willfully violate any other provision of the SEC.

Front 34

SEction 32 A

Back 34

Makes it a criminal offense or any person to willfully and knowing make or cause any false or misleading statement in any application, report, or other document required to be filed iwth the SEC.

Front 35

Tax reform act of 1976

Back 35

Imposes criminal liability on accountants and others who prepare federal tax returns if they
1. willfully understate a client's tax liability.
2. Negligently understate the tax liability
or
3. Aid or assist in the preparation of a false tax return

Front 36

Racketeer influenced and corrupt organizations act

Back 36

A federal act that provides for both criminal and civil penalties for securities fraud.

Front 37

SOX

Back 37

federal act that imposes new rules that affect public accountants

Front 38

What does SOX do?

Back 38

created PCAOB
REquires accounting firms to register with PCAOB
Separates audit services and non-audit services
REquires an audit partner of the accounting firm to supervise an audit and approve an audit report requires a second partner to review and approve the report
Prohibits employment of an accountant by a previous audit client for certain positions for a period of one year following the audit.

Front 39

Accountant-client privilege

Back 39

A state statute which provides that an accountant cannot be called as a witness against a client in a court action.

Front 40

Work product immunity

Back 40

a state statue that provides an accountant's work papers cannot be used against a client in a class action.

Front 41

entrepreneur

Back 41

A person who forms and operates a new business either by himself or herself or with others.

Front 42

sole proprietorship

Back 42

A form of business in which the owner is actually the business the business is not a separate legal entity

Front 43

advantages of sole proprietor

Back 43

easy and cheap to form
Owner can make all management decisions
proprietor has rights to all profits
can be easily transferred or sold.

Front 44

liability of sole proprietor

Back 44

They bear the risk of loss of the business. Have unlimited personal liability as well.

Front 45

Taxation of sole proprietorship

Back 45

Separate legal entity so doesn't pay taxes at business level. Instead reported on sole proprietor's tax return. Has to file and pay taxes to state and federal government.

Front 46

General partnership

Back 46

An association of 2 or more persons to carry on as co-owners of a business for profit. Also known as an ordinary partnership. Rights and duties are established in a partnership agreement.

Front 47

General partners

Back 47

Persons liable for the debts and obligations of a general partnership.

Front 48

Uniform partnership act

Back 48

A model act that codifies partnership law. Most states have adopted it in part or whole.

Front 49

What does the uniform partnership act require?

Back 49

Must file fictitious business name to operate under a trade name
Must publish notice of use of trade name in a newspaper of general circulation
Partnerhip canot indicate that it is a corp.

Front 50

Formation of general partnership

Back 50

1. association of 2 ppl or more
2. Carrying on a business
3. as co-owners
4. for profit

Front 51

Partnership agreement

Back 51

written, oral, or implied can be created inadvertently. No formalities necessary. Good practice to put it in writing in case of disagreement.

Front 52

Taxation of partnerships

Back 52

do not pay federal taxes instead the income and losses flow through to partners personal inome tax.

Front 53

Right to participate in management

Back 53

A situation in which, unless otherwise agreed, each partner has a right to participate in the management of a partnership and has an equal vote on partnership matters. Each partner has one vote regardless of size of capital contribution or profit share.

Front 54

Right to share in profits

Back 54

unless otherwise agreed equal.

Front 55

Right to compensation

Back 55

Not entitled to salary unless agreed upon by partners

Front 56

indemnification

Back 56

right of a partner to be reimbursed for expenditures incurred on behalf of the partnership. they have the right to this so long as expenses are reasonable and incurred in ordinary and proper conduct of the business.

Front 57

Right to return loans and capital

Back 57

A partner who loans has right to repayment but this right is subordinate to the claims of creditors who are not partners. Also entitled to receive interest.

Front 58

Right to information

Back 58

Right to demand true and full information from all partners of all things affecting partnership

Front 59

Duty of loyalty

Back 59

A duty that a partner owes not to act adversely to the interests of a partnership.

Front 60

Self dealing

Back 60

occurs when a partner personally deals with the partnership such as buying or selling goods or property to the partnership. Such actions permitted only if full disclosure is made and consent of other partners is obtained.

Front 61

Usurping a partnership opportunity

Back 61

A partner who is offered an opportunity on behalf of partnership cannot usurp opportunity for themselves. Example if a third party offers a business opportunity to partner in his partnership status, partner cannot accept it unless he first offers it to the partnership.

Front 62

compete with partnership

Back 62

can't compete without consent of partners.

Front 63

seceret profits

Back 63

can't make seceret profits

Front 64

breach of confidentiality

Back 64

partners muse keep partnership info private

Front 65

misuse of property

Back 65

Owe duty not to use property for personal use

Front 66

Duty of care

Back 66

Obligation partners have to use same level of care and skill a reasonable person in the same position would use in the same circumstances a breach of this duty is negligence. Partners are not liable for honest errors in judgement

Front 67

Duty to inform

Back 67

a partner must inform co-partners of all info he/she possesses that is relevant to affairs of the partnership.

Front 68

Duty of obedience

Back 68

A duty that requires partners to adhere to provisions of partnership agreement and decisions of the partnership.

Front 69

Action for an accounting

Back 69

A formal judicial proceeding in which the court is authorized to 1. review the partnership and the partners transactions.
2. Award each partner his/her share of the partnership interests.

Front 70

Joint and several liability

Back 70

Tort liability of partners together and individually. A plaintiff can sue one or more partners separately. If successful the plaintiff can recover the entire amount of the judgment from any or all of the defendant partners who have been found liable.

Front 71

Joint liability

Back 71

Liability of partners for contracts and debts of the partnership. A plaintiff must name the partnership and all of the partners as defendants in a lawsuit A third party who sues to recover on a partnership contract or debt must name all partners in the lawsuit. if successful may collect against any or all of the partners. If not all named judgement can't be collected against any of the partners.

Front 72

Liability of incoming partners

Back 72

new partners are liable for existing debts and obligations only the the extent of his/her capital contribution. Incoming partner is liable for debts and obligations incurred by partnership after becoming partner.

Front 73

Partnership for a term

Back 73

A partnership created for a fixed duration

Front 74

Partnership at will

Back 74

Created with no fixed duration

Front 75

Dossoluiotion

Back 75

change in relation f partners caused by any partner ceasing to be associated in the carrying on of the business.

Front 76

winding up

Back 76

The process of liquidating a partnership's assets and distributing the proceeds to satisfy claims against the partnership.

Front 77

Wrongful dissolution

Back 77

A situation in which a partner withdraws from a partnership without having the right to do so at that time. Liable for damages caused by this

Front 78

Notice of dissoluton

Back 78

must be given to third parties.
1. Actually dealt with partnership must be verbally or written given actual notice
2. Third parties who have knowledge of but haven't contracted must be given constructive notice which means newspaper.
3. No dealing no knowledge no notice

Front 79

distribution of assets

Back 79

1. creditors (other than partners)
2. Creditor-partners
3. Capital contributions
4. Profits

Front 80

Continuation of partnership

Back 80

surviving/remaining partners have right to continue partnership after dissolution should enter into a continuation agreement which specifies amount to be paid to outgoing partners.

Front 81

Liability of outgoing partners

Back 81

Doesn't change the liability for exisiting partnership liabilites. Each partner is responsible for their share of debts at dissolution.