MODULE 21 PROFESSIONAL RESPONSIBILITIES 69

(1) No auditing procedures have been applied

(2) Insufficient audit procedures have been applied to express an opinion
2. Failure to mark each page, "unaudited"
3. Failure to issue a disclaimer of opinion
4. Failure to inform client of any discovery of something amiss
(1) For example, circumstances indicating presence of fraud
5. Criminal Liability
1. Sources of liability
. .
6. Securities Act of 1933 and Securities Exchange Act of 1934
(1) Can be found guilty for willful illegal conduct
(a) Misleading omission of material facts
(b) Putting false information in registration statement
(2) Subject to fine of up to $10,000 and/or up to five years prison
(3) Examples of possible criminal actions
(a) CPA aids management in a fraudulent scheme
(b) CP A covers up prior year financial statement misstatements
7. Criminal violations of Internal Revenue Code
(1) For willfully preparing false return (perjury)
(2) For willfully assisting others to evade taxes (tax evasion)
8. Criminal liability under RICO (Racketeer Influenced and Corrupt Organizations)
(1) Covers individuals affiliated with businesses or associations involved in a pattern of racketeer-
ing
(a) Racketeering includes organized crime but also includes fraud under the federal securities
laws as well as mail fraud
1] Accountants subject to criminal penalty through affiliation with accounting firm or
business involved in racketeering
(b) Pattern of racketeering means at least two illegal acts of racketeering in previous ten years
(2) RICO has also been expanded to allow civil suit by private parties
(a) Treble damages allowed (to encourage private enforcement)
(b) Has been held to apply against accountants even without a criminal indictment or convic-
tion
9. Responsibilities of Auditors under Private Securities Litigation Reform Act
10. Auditors who audit financial statements under Federal Securities Exchange Act of 1934 are
required to
establish procedures to
11. Detect material illegal acts
12. Identify material related-party transactions, and
13. Evaluate ability of firm to continue as going concern
14. If auditor detects possible illegal activity, must inform audit committee or board of directors
15. If senior management or board fails to take remedial action and if illegal activities are material so
that departure from standard audit report or auditor resignation is indicated, auditor shall report
this to board of directors
(1) Board has one day to notify SEC of this report
(a) If not done, auditor must furnish SEC with copy of auditor's report to board and/or resign
from audit
16. Civil liability may be imposed by SEC for auditor's failures under Act
a. Auditors are protected from private civil suits for these reports to SEC und~r this Act