Regulation Topic: How not to get sued
One of the big topics on the Regulation section of the CPA exam is Legal Liability. The legal liability section discusses under which circumstances an auditor can be sued for misstatements in a client’s financial statements.
Following GAAS (Generally Accepted Auditing Standards) is a good defense against any of these charges, so Regulation also tests CPA candidates on GAAS.
The Securities Act of 1933 regulates original issuance of stock, and governs auditors responsibilities as participants in that process.
The Securities and Exchange Act of 1934 regulates the subsequent trading of stock (ie, the financial statements companies issue to stockholders) and matters relating to fraud.
Conveniently, my audit class has been complementing my Roger CPA preparation, and we’ve been reading some cases about auditors getting sued for negligence (and losing). It’s a cool way to review legal liability, and the burden of proof for negligence. It’s also interesting to see cases where auditors got duped by clever clients, but the auditors were still held accountable because they could have found the fraud if they took their audit one step further. It’s a good reminder to maintain healthy professional skepticism.
Some interesting reading to relate Regulation studying to the real world is this article on Re: The Auditors that addresses a case faced by PWC and the auditor’s responsibility to find fraud under the Sarbanes-Oxley Act (2002) rules.
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