1.Analyze the audit report that the CPA firm issued. Ascertain the legal liability to third parties who relied on financial statements under both common and federal securities laws. Justify your response.
2.Speculate on which statement of generally acceptable auditing standards (GAAS) that the company violated in performing the audit.
3.Compare the responsibility of both management and the auditor for financial reporting, and give your opinion as to which party should have the greater burden. Defend your position.
4.Analyze the sanctions available under SOX, and recommend the key action(s) that the PCAOB should take in order to hold management or the audit firm accountable for the accounting irregularities. Provide a rationale for your response.
1. Securities exchange commission charged Computer Science Corporation and the former executives of the company for manipulation of financial results and hiding the considerable problems related to the organization’s most high-profile and largest contact. The chair of the Public Accounts Committee publicly quoted that the proposal of CSC were unspeakably unacceptable and no way is there that they were working for the government and it was a clear case of GAAP violation. Further, CSC failed to align with the GAAP as they failed to impair the contract assets even when it established that the company will not be able to recover their investment (SEC.gov | Home, 2017).
The legal liability of the CPAs is the duties of the auditor to the third parties and the clients those were relying on the financial statements of the company. Accountants can be charged for negligence and fraud in their performance. The opinion of the CPAs has an impact on the clients and the judgement given by them can affect the creditors, shareholders, investors and even the partner of the company. While auditing, the CPAs come across the unmodified financial reports of the companies that may appeared to be misleading. If the CPAs fail to modify the report that may be materially misstated, the firm creditors and the investors may exposed to substantial losses. Further the CPAs are liable under state securities law as well as the federal laws. The laws provide protection against the penalties, fines and the defence cost. Under the statutory laws, the auditors are held liable as criminal or civil offence (SEC.gov | SEC Charges CSC and Former Executives With Accounting Fraud, 2017).
2. The company violated in terms of negligence while performing the audit. They were failed to exercise professional care and owing to this the the third parties and clients both can sue the CPAs for the negligence that involves damage, injury or wrongful act for that the civil action can b taken against the auditors. The negligence can be gross negligence or ordinary negligence. The CPAs in the given case will be charged for the gross negligence as they lack for taking into account the expected impact of injuries.
3. The responsibility for the financial reporting goes both to the auditor and the management as the management are responsible for preparing the financial statement and the auditors are responsible for commenting upon the financial report and to find the material misstatement exist in the statements. In the given case, CSC and five of their eight executives charged to pay $190 million penalty and agreed to engage an independent consultant for reviewing the ethics and compliance programmes for the ethics of the company. Therefore, the company and the executives were mainly responsible for the fraud and should have greater burden.
4. The Public Company Accounting Oversight Board is the non-profit corporation that was established by the congress to supervise the public organization’s audit to protect the public interest and the investors through promotion of independent, accurate and informative audit reports. They are also responsible for supervising the compliance reports filed as per the federal securities, laws for promoting the protection of the investors.
The establishment of PCAOB was the key element for the Sarbanes-Oxley Act 2002. Apart from authorizing the PCAOB for inspection and setting-up the professional standards for the public accounting organizations, Sarbanes-Oxley presented the discretion of the board to investigate and the discipline organizations and the persons associated with for the violations of laws related to federal securities that governs the issuance and preparation of the audit reports and various other professional standards (Hostak, Yang & Carr, 2013). The Sarbanes-Oxley has done so, but without reducing the authority for the existing enforcement for the Securities and Exchange Commission over the auditors of public companies. Since the establishment, PCAOB normally tried to coordinate the enforcement efforts with the SEC. if the act is being applied properly by every company then each company can be held liable (Mission and Vision, 2017).
The act established for funding the activities of PCAOB through the accounting support fees annually. The fees are analysed on the public companies that are based on the average monthly rate of market capitalization and the dealers-brokers that are based on the projected average quarterly net capital.
SEC.gov | SEC Charges CSC and Former Executives With Accounting Fraud. (2017). Sec.gov. Retrieved 8 May 2017, from https://www.sec.gov/news/pressrelease/2015-111.html
Hostak, P., Lys, T., Yang, Y. G., & Carr, E. (2013). An examination of the impact of the Sarbanes–Oxley Act on the attractiveness of US capital markets for foreign firms. Review of Accounting Studies, 18(2), 522-559.
SEC.gov | Home. (2017). Sec.gov. Retrieved 8 May 2017, from https://www.sec.gov/
Mission and Vision. (2017). Pcaobus.org. Retrieved 8 May 2017, from https://pcaobus.org/About/History/Pages/default.aspxa