George B. bought 1,000 shares of stock, relying on the annual financial statemen
ID: 2561190 • Letter: G
Question
George B. bought 1,000 shares of stock, relying on the annual financial statement and audit report prepared by your firm. The price of the stock dropped significantly, resulting in a large financial loss to George. He is contemplating a lawsuit against your CPA firm.
George's attorney has advised him that he must prove the following:
Material misstatement in the financial statements.
The amount of his loss.
Lack of due diligence on the part of the CPA.
Privity with the CPA.
His reliance on the information contained in the financial statements.
His claim that the CPA had scienter.
Determine which of the facts must be proven under either the Security Act of 1933 or 1934, and support your determination by citing the appropriate act. For example: Section A, paragraph B states, [copy and paste the statement].
Identify under which security act these facts must be proven in order for George to prevail in a lawsuit.
Identify the AICPA Code of Conduct rules and provide an example of a rules violation.
Explanation / Answer
Proven facts for George are Material misstatement in the financial statements, The amount of his loss and Lack of due diligence on the part of the CPA. Applicable act and section as follows:-
1. Material misstatement in the financial statements
George can file a lawsuit for the material misstatement in the financial statement on CPA Firm.
Material Misstatement claim can be filed under the section 4A(c) act Security Act of 1933.
"On any person who is a director or partner of the issuer, and the principal executive officer or officers, principal financial officer, and controller or principal accounting officer of the issuer (and any person occupying a similar status or performing a similar function) that offers or sells a security in a transaction exempted by the provisions of section 4(6), [8] and any person who offers or sells the security in such offering"
Details wording as below:-
(c) LIABILITY FOR MATERIAL MISSTATEMENTS AND OMISSIONS.—
(1) ACTIONS AUTHORIZED.—
(A) IN GENERAL.—Subject to paragraph (2), a person who purchases a security in a transaction exempted by the provisions of section 4(6) [8] may bring an action against an issuer described in paragraph (2), either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if such person no longer owns the security.
(B) LIABILITY.—An action brought under this paragraph shall be subject to the provisions of section 12(b) and section 13 as if the liability were created under section 12(a)(2).
(2) APPLICABILITY.—An issuer shall be liable in an action under paragraph (1) if the issuer—
(A) by the use of any means or instruments of transportation or communication in interstate commerce or of
the mails, by any means of any written or oral communication, in the offering or sale of a security in a transaction
exempted by the provisions of section 4(6), [8] makes an untrue statement of a material fact or omits to state a material fact required to be stated or necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading, provided that the purchaser did not know of such untruth or omission; and
(B) does not sustain the burden of proof that such issuer did not know, and in the exercise of reasonable care could not have known, of such untruth or omission.
(3) DEFINITION.—As used in this subsection, the term
‘‘issuer’’ includes any person who is a director or partner of the issuer, and the principal executive officer or officers, principal financial officer, and controller or principal accounting officer of the issuer (and any person occupying a similar status or performing a similar function) that offers or sells a security in a transaction exempted by the provisions of section 4(6), [8] and any person who offers or sells the security in such offering
2. Lack of due diligence on the part of the CPA
According to section 7(c) of Security Act of 1933 act, issuers of asset-backed securities, at a minimum, to disclose asset-level or loan level data, if such data are necessary for investors to perform due diligence.
George can add this point in his lawsuits.
AICPA Code of Conduct rules
1. The AICPA membership adopted the Code of Professional Conduct (the code) to provide guidance and rules to all members in the performance of their professional responsibilities. The code consists of principles and rules as well as interpretations and other guidance. The principles provide the framework for the rules that govern the performance of their professional responsibilities.
2. The AICPA bylaws require that members adhere to the rules of the code. Compliance with the rules depends primarily on members’ understanding and voluntary actions; secondarily on reinforcement by peers and public opinion; and ultimately on disciplinary proceedings, when necessary, against members who fail to comply with the rules. Members must be prepared to justify departures from these rules.
Rules violation happens because of following common reason
1. Lack of objectivity: "We don't see things as they are; we see them as we want them to be."
2. Power: Really smart people do really stupid stuff. If smart people didn't do dumb stuff. People with a sense of power are overconfident in their abilities and consistently reject advice, leading to suboptimal decisions.
3. Superiority bias: Multiple studies have shown that powerful people deceive themselves into decisions that are consistently worse than those made by people who feel less powerful but accept advice.
4. Pressure: We subordinate our judgment to a more powerful person, such as a boss or a client, or to obtain or maintain the status quo, for a lifestyle, or for a position in the entity.
5. Ignorance: CPAs simply don't know the ethics requirements and prohibitions - the focus of this article.
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