Quiz 48: Personal Property and Bailments

Business

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The Untramares Rule: An accountant in violation of GAAP is considered prima facie evidence of negligence. A court may hold an accountant to a higher standard of conduct than is established by state statute. Auditors can be held liable to third parties for negligence. Under the Restatement (Second) of Torts , ultramares has evolved to include foreseen, or known, users of the audits that they produce. Under §552 of the Restatement (Second) of Torts , an accountant's liability extends to: 1. Persons who hire the accountant or will receive guidance or benefit from his/her expertise, or 2. Persons who will receive or be influenced by the information that the accountant prepares. The Sarbanes-Oxley Act of 2002 regulates corporate accounting procedures and enforces the adherence to generally accepted accounting principles (GAAP). 1. Sections 906 and 302 of Sarbanes-Oxley require the CEO and CFO to certify the accuracy and truthfulness of periodic reports. If the reports contain discrepancies, the CEO and CFO can be found criminally liable. The penalties include imprisonment of 10 to 20 years. Additionally, civil penalties can include fines of up to $5 million. Table 1 has contains a brief overview of penalties for deviant behavior: Table 1 img

Sec 11 imposes a duty on accountants to use due diligence in preparing financial statements included in the filed registration statements. After the purchaser has proved a loss on the security, the accountant has the burden of showing that he or she exercised due diligence in preparing the financial statements. To prove due diligence, the accountant must demonstrate that he or she followed generally accepted standards and did not commit negligence or fraud. To avoid liability, the accountant must show that he or she: 1. Conducted a reasonable investigation 2. Had reasonable grounds to believe and did believe the statements were true and there was no omission of a material fact that would be misleading.

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