Business Law Today Study Set 1

Business

Quiz 35 :

Liability of Accountants and Other Professionals

Quiz 35 :

Liability of Accountants and Other Professionals

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What did the majority conclude on the central question in this case, and what points supported this conclusion?
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The majority concluded that existing private clubs shall be exempted from the smoking ban on a rational basis. According to the majority, the claimed privacy interests of private club members shall be protected to avoid a conflict with the Indian tribes.
The court pointed out that the exemption was constitutional to support its conclusion. It argued that private club establishments are nothing but an extension of people's private homes. They are members of the organizations. People have fixed memberships for which they pay dues or fees to belong to them. It is similar to as people were gathering in their living rooms. Thus, the majority considered it as the private domain, not the public one. Exempting existing private clubs from smoking ban is mainly to protect club's financial investment and the expectations of the members of private clubs.

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What was the dissent's analysis with regard to the question?
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The dissenting opinion over the issue was that exempting existing private clubs from smoking ban gives absolute deference to the legislature. The defendants argued that smoking ban was to protect the employees in café and restaurants from second hand.
However, the dissent could not find any rational relationship between the intent and the exemption of private clubs from smoking ban. They assert that private clubs also employ many employees, and they by no means are less susceptible to the ill effects of second hand smoke.
Moreover, the dissent found that there is no evidence that the private club members have joined merely with the expectation that smoking would be allowed there. As opposed to the claim that people gathering in private clubs as in their living rooms, the dissenting opinion was that residential living rooms do not require full-time employees nor do they charge membership fees.

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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. How might an accountant violate federal securities laws?
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An accountant may violate a federal security law by:
• Misstating a material fact or omission of such fact in the financial statements prepared by him or her
• making a misleading or false statement in a required filing on which any buyer or seller of the asset has acted in reliance
• aiding or abetting those who make misleading statements

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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. What constrains professionals to keep communications with their clients confidential?
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Alpha Software, Inc., and Beta Products Corporation-both small firms-are competitors in the business of software research, development, and production. To market its products profitably, Beta considers a number of advertising and labeling proposals. One proposal is that Beta suggest in its advertising that one of its software products has a certain function without indicating on the packaging that the product does not actually have that capability. Another suggestion is that Beta sell half of a certain program in packaging that misleads the buyer into believing the entire program is included. To obtain the entire program, customers would need to buy a second product. Can Beta implement these suggestions or otherwise market its products any way it likes? If not, why not?
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Accountant's Liability to Third Parties. In June 1993, Sparkomatic Corp. agreed to negotiate a sale of its Kenco Engineering division to Williams Controls, Inc. At the end of July, Sparkomatic asked its accountants, Parente, Randolph, Orlando, Carey Associates, to audit Kenco's financial statements for the previous three years and to certify interim and closing balance sheets to be included with the sale's closing documents. All of the parties knew that these documents would serve as a basis for setting the sale price. Within a few days, Williams signed an "Asset Purchase Agreement" that promised access to Parente's records with respect to Kenco. The sale closed in mid-August. In September, Williams was given the financial statements for Kenco's previous three years and the interim and closing balance sheets, all of which were certified by Parente. Williams's accountant found no errors in the closing balance sheet but did not review any of the other documents. The parties set a final purchase price later, how-ever, Williams filed a suit in a federal district court against Parente, claiming negligent misrepresentation, among other things, in connection with Parente's preparation of the financial documents. Parente responded with a motion for summary judgment, asserting that the parties lacked privity. Under the Restatement (Second) of 'lions, Secton 552, how should the court rule? Explain. [Williams Controls, Inc. v. Parente, Randolph, Orlando, Carey Associates, 39 F.Supp.2d 517 (M.D.Pa. 1999)]
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Superior Wholesale Corporation planned to purchase Regal Furniture, Inc., and wished to determine Regal's net worth. Superior hired Lynette Shuebke, of the accounting firm Shuebke Delgado, to review an audit that had been prepared by Norman Chase, the accountant for Regal. Shuebke advised Superior that Chase had performed a high-quality audit and that Regal's inventory on the audit dates was stated accurately on the general ledger. As a result of these representations, Superior went forward with its purchase of Regal. After the purchase, Superior discovered that the audit by Chase had been materially inaccurate and misleading, primarily because the inventory had been grossly overstated on the balance sheet. Later, a former Regal employee who had begun working for Superior exposed an e-mail exchange between Chase and former Regal chief executive officer Buddy Gantry The exchange revealed that Chase had cooperated in overstating the inventory and understating Regal's tax liability Using the information presented in the chapter, answer the following questions. 1. If Shuebke's review was conducted in good faith and conformed to generally accepted accounting principles, could Superior hold Shuebke Delgado liable for negligently failing to detect material omissions in Chase's audit? Why or why not? 2. According to the rule adopted by the majority of courts to determine accountants' liability to third parties, could Chase be liable to Superior? Explain. 3. Generally, what requirements must be met before Superior can recover damages under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5? Can Superior meet these requirements? 4. Suppose that a court determined that Chase had aided Regal in willfully understating its tax liability What is the maximum penalty that could be imposed on Chase?
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Alpha Software, Inc., and Beta Products Corporation-both small firms-are competitors in the business of software research, development, and production. Alpha and Beta form a joint venture to research, develop, and produce new software for a particular line of computers. Does this business combination violate the antitrust laws? If so, is it a per se violation, or is it subject to the rule of rea-son? Alpha and Beta decide to merge. After the merger, Beta is the surviving firm. What aspect of this firm's presence in the market will be assessed to decide whether this merger is in violation of any antitrust laws?
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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. Under what common law theories may professionals be liable to clients?
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POLITICAL DIMENSIONS. To reach its conclusion, did the majority have to agree with the legislature's decision to exempt most private clubs from the smoking ban? Why or why not?
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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. What crimes might an accountant commit under the Internal Revenue Code?
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Question with Sample Answer-The Ultramares Rule. The accounting firm of Goldman, Walters, Johnson Co. prepared financial statements for Lucy's Fashions, Inc. After reviewing the financial statements, Happydays State Bank agreed to loan Lucy's Fashions $35,000 for expansion. When Lucy's Fashions declared bankruptcy under Chapter 11 six months later, Happydays State Bank filed an action against Goldman, Walters, Johnson Co., alleging negligent preparation of financial statements. Assuming that the court has abandoned the Ultramares approach, what is the result? What are the policy reasons for holding accountants liable to third parties with whom they are not in privity?
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Alpha Software, Inc., and Beta Products Corporation-both small firms-are competitors in the business of software research, development, and production. Beta provides health insurance for its two hundred employees, including Dan. For personal medical reasons, Dan takes twelve weeks' leave. During this period, can Dan continue his coverage under Beta's health-insurance plan? If so, at whose expense? After Dan returns to work, Beta doses Dan's division and terminates the employees, including Dan. Can Dan continue his coverage under Beta's health-insurance plan? If so, at whose expense?
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Alpha Software, Inc., and Beta Products Corporation-both small firms-are competitors in the business of software research, development, and production. The production part of Beta's operations generates hazardous waste. Gamma Transport Company transports the waste to Omega Waste Corporation, which owns and operates a hazardous waste-disposal site. At the site, some containers leak hazardous waste, and the Environmental Protection Agency (EPA) cleans it up. From whom can the EPA recover the cost of the clean-up?
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Accountants Liability under Rule 10b-5. In early 1995, Bennett, Inc., offered a substantial number of new common shares to the public. Harvey Helms had a long-standing interest its Bennett because his grandfather had once been president of the company. On receiving a prospectus pm-pared and distributed by Bennett, Helms was dismayed by the pessimism it embodied. Helms decided to delay purchasing stock in the company. Later, Helms asserted that the prospectus prepared by the accountants was overly pessimistic and contained materially misleading statements. Discuss fully how successful Helms would he in bringing a cause of action under Rule 10b-5 against the accountants of Bennett, Inc.
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ECONOMIC DIMENSIONS. What arc the likely economic effects of the outcome in this case? Explain.
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Alpha Software, Inc., and Beta Products Corporation-both small firms-are competitors in the business of software research, development, and production. Beta has a policy against sexual harassment that includes specific procedures for reporting, investigating, and resolving incidents of alleged harassment. Kay, a Beta employee, believes that she has been the object of her supervisor's sexual comments on the job and she perceives these comments as offensive. She reports the incident, and Beta follows up with an investigation but decides that there is no basis for disciplining the supervisor. Kay subsequently quits her job and eventually files a suit against Beta. What must Kay prove to win her case? What is Beta's best defense?
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The Ultramares Rule. Larkin, Inc., retains Howard Perkins to manage its books and prepare its financial statements. Perkins, a certified public accountant, lives in Indiana and practices there. After twenty years, Perkins has become a bit bored with generally accepted accounting principles (GAAP) and has adopted more creative accounting methods. Now, though, Perkins has a problem, as he is being sued by Molly Tucker, one of Larkin's creditors. Tucker alleges that Perkins either knew or should have known that Larkin's financial statements would be distributed to various individuals. Furthermore, she asserts that these financial statements were negligently prepared and seriously inaccurate. What are the consequences of Perkins's failure to follow GAAP? Under the traditional Ultramares rule, can Tucker recover damages from Perkins? Explain.
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The following multiple-choice question is representative of the types of questions available in one of the four sections of ThomsonNOW for Business Law Today. ThomsonNOW also provides feedback for each response option, whether correct or incorrect, and refers to the location within the chapter where the correct answer can be found. The Restatement (Second) of Torts states that accountants will be liable to third parties for their negligent acts
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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. What are the rules concerning an auditor's liability to third parties?
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