Case 7.5 Essay

670 Words Feb 16th, 2013 3 Pages
Case 7.5: Fred Stern & Company, Inc.
(Ultramares Corporation v. Touche et al.)

1. Observers of the accounting profession suggest that many courts attempt to “socialize” investment losses by extending auditors’ liability to third-party financial statement users. Discuss the benefits and costs of such a policy to public accounting firms, audit clients, and third-party financial statement users, such as investors and creditors. In your view, should the courts have the authority to socialize investment losses? If not, who should determine how investment losses are distributed in our society?
a. Benefits
i. Public accounting firms
1. Held more accountable, because their audits and reports affect a larger population of people
2.
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2. Auditors’ legal responsibilities differ significantly under the Securities Exchange Act of 1934 and the Securities Act of 1933. Briefly point out these differences and comment on why they exist. Also comment on how auditors litigation risks differ under the common law and the 1934 Act.
a. Securities Exchange Act of 1934
b. Securities Act of 1933
i. Plaintiffs do not have to prove fraud, gross negligence, or negligence on the part of the auditors ii. Must only establish that they suffered investment losses and that the relevant F/S contain material errors or omissions iii. If these elements are established, the accounting firm assumes the burden of proving that its employees were “duly diligent” in performing the audit
1. To do this they must show that after a “reasonable investigation” it had “reasonable ground to believe and did believe” that the audited financial statements were materially accurate
c. Auditors have burden or proof in 1933, plaintiff has burden or proof in 1934

5. When assessing audit risk, should auditors consider the type and number of third parties that may ultimately rely on the client’s financial statements? Should auditors insist that audit engagement letters identify the third parties to whom the client intends to distribute the audited financial statements? Would this practice eliminate auditors’ legal liability to non privity (have some kind of legal contract) parties not

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