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Legal Liability

Legal Liability. Civil Liability. Need to prove: Liability? (auditor at fault) Causation? (failure of audit caused damage) Damages? (amount of loss) Another issue: Privity Have the right to sue? Another issue: Burden of Proof Plaintiff or Defendant?.

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Legal Liability

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  1. Legal Liability

  2. Civil Liability • Need to prove: • Liability? (auditor at fault) • Causation? (failure of audit caused damage) • Damages? (amount of loss) • Another issue: Privity • Have the right to sue? • Another issue: Burden of Proof • Plaintiff or Defendant?

  3. Civil Liability -- Different Criteria • Liability to clients (privity) • Liability to third parties under common law • Liability to third parties under statutory law

  4. Liability to Clients - Concepts • Due care • Comparative negligence defense • Confidential relationship

  5. Common Law - Liability to Third Parties: Level of Auditor’s Fault • Fraud intentional misstatement or concealment of a material fact • Gross negligence flagrant or reckless departure from the standard of due care, or willful and wanton misconduct • Ordinary negligence an unintentional act, a thoughtless slip or blunder

  6. Common Law - Liability to Third PartiesApproaches • Primary beneficiaries and near-client equivalents • Foreseen or intended beneficiaries • Foreseeable beneficiaries

  7. Statutory Law -Liability to Third Parties • Securities Act (1933) - Initial Offerings to the Public • Burden of Proof: Defendant • Exchange Act (1934) - Ongoing Reporting • Burden of Proof: Plaintiff

  8. Exchange Act - Rule 10b-5 Need to prove that -- • Auditor made one or more false representation(s) • Plaintiff relied on Auditor’s representations • Auditor knew or should have known representations were false • Damages were caused by Auditor’s representations

  9. Criminal Liability

  10. Noted Legal Cases • Bar Chris • Yale Express • Continental Vending • U.S. Financial • National Student Marketing • 1136 Tenants Corporation • Equity Funding • Fund of Funds • Credit Alliance Corporation • Mann Judd Landau • ESM • Bily • Crazy Eddie

  11. Protection Against Liability • Liability insurance • Quality control • Tort reform

  12. Forensic Accounting

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