Court Cases (Chapter 5) – Flashcards
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United States v. Simon
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3 Auditors filed false financials (criminal liability)
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United States v. Natelli (1975)
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2 auditors convicted under 1934 act, certifying inadequate disclosures; National Student Marketing Corporation
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ESM Government Securities v. Alexander Grant & Co. (1986)
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Agreed to say nothing in the hope that management would work its way out of the problem. convicted for criminal charges
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United States v. Weiner (1975)
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3 auditors convicted of securities fraud, Equity Funding Corporation of America. Fraud was so extensive and audit work so poor they must have been aware of the fraud.
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United States v. Andersen (2002)
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destruction of documents and obstruction of justice.
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Howard Sirota v. Solitron Devices, In. (1982)
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Overstating inventory, responsible for reckless behavior and appeals concluded that there was sufficient evidence to show connection for 10b-5
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hochfelder v. Ernst & Ernst (1976)
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Interpretation of rule 10b-5 didn't meet the requirements of "intent to deceive, manipulate or defraud." Not found liable.
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Escort et al. v. BarChris Construction Coporation (1968)- securities act of 1933
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17 months later BarChris filed for bankruptcy. auditors were inexperienced, too easily satisfied with glib answers to is inquiries. It is not always sufficient merely to ask questions. CPA firm found liable.
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Worlds of Wonder (1994) and Software Toolworks (1994)
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poor judgment isn't proof of fraud
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Rosenbaum, Inc. v. Adler (1983)
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unlimited class of users that the auditor should have reasonably been able to foresee as being likely users of the financial statements.
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Rusch Factors v. Levin (1968)
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company was insolvent but Auditor said they were solvent. Plaintiff loaned the money and suffered a loss. The defense was absence of privity
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Bill v Arthur Young (1992)
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"an auditor owes no general duty of care regarding the conduct of an audit to persons other than the client" upholding the Restatement of torts
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Credit Alliance v. Arthur Andersen & Co. (1986)
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1 an editor must know and intend that the work product would be used by the third party for a specific purpose and 2 the knowledge and intent must be evidenced by the auditors conduct.
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Ultramares Corporation v. Touche (1931) liability to third parties
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a primary beneficiary is one about whom the auditor was informed before conducting the audit (a known third party). Lack of privity of contract between the third party and the auditor, unless the third party is a primary beneficiary. A creditor relied on the audited financials.
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1136 Tenants v. Max Rothenberg and Company (1967)- Liability to clients
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manager embezzled significant funds. "missing invoices" Had the CPA followed up then the fraud would have been uncovered; had a duty to follow up. Engagement letters and the Accounting and Review Services Committee (ARSC) formed.
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Cinco Incorporated v. Sideman & Sideman (1982)- liability to clients
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top management involved in a massive fraud to inflate the value of inventory. CPA firm settled for 3.5 million. combined efforts and collusion prevented CPAs from uncovering fraud. Second suite the appeals concluded CPA was not responsible.
