86 MODULE 21 PROFESSIONAL RESPONSIBIliTIES
Answer (a) is incorrect because under the 1933 Act it is not
necessary for the purchaser of securities to prove "scienter,"
or knowledge of material misstatement, on the part of the
CPA. Answers (b) and (d) are incorrect because under the
1933 Act, the plaintiff need not prove negligence on the part
of the CP A or that there was reliance by the plaintiff on the
financial statements included in the registration statement.
42. (c) In a Section 11 suit under the 1933 Act, the
plaintiff may recover damages equal to the difference be-
tween the amount paid and the market value of the stock at
the time of the suit. If the stock has been sold, then the
damages are the difference between the amount paid and the
sale price. Answer (a) is incorrect because damages of triple
the original price are no! provided for under this act. An-
swer (b) is incorrect because rescission is not a remedy
under this act. Answer (d) is incorrect because if the shares
have not been sold before the suit, then the court uses the
difference between the amount paid and the market value at
the time of the suit.
43. (b) Under Section 11 of the 1933 Act, if the plaintiff
proves damages and the existence of a material misstatement
or omission in the financial statements included in the regis-
tration statement, these are sufficient to win against the CP A
unless the CP A can prove one of the applicable defenses.
Due diligence is one of the defenses. Answer (a) is incorrect
because contributory negligence is not a defense under Sec-
tion 11. Answer (c) is incorrect because the purchaser need
not prove privity with the CPA. Answer (d) is not correct
because the purchaser needs to prove the above two ele-
ments but not scienter.
44. (d) To impose liability under Section 11 of the Se-
curities Act of 1933 for a misleading registration statement,
the plaintiff must prove the following: (1) damages were
incurred, and (2) a material misstatement or omission was
present in financial statements included in the registration
statement. The plaintiff generally is not required to prove
the defendant's intent to deceive nor must the plaintiff prove
reliance on the registration statement.
45. (c) The proof requirements necessary to establish an
accountant's liability under the Securities Act of 1933, Sec-
tion 11 are as follows: (1) the plaintiff must prove damages
were incurred, and (2) the plaintiff must prove there was '"
material misstatement or omission in financial statements
included in the registration statement. To establish an ac-
countant's liability under the Securities Exchange Act of
1934, Section lO(b), Rule IOb-5, the following elements
must be proven: (1) damages resulted to the plaintiff in
connection with the purchase or sale of a security in inter-
state commerce, (2) a material misstatement or omission
existed in information released by the firm, (3) the plaintiff
justifiably relied on the financial information, and (4) the
existence of scienter. Because Sharp can prove that dam-
ages were incurred and that the statements contained mate-.
rial misstatements, Sharp is likely to prevail in a lawsuit
under the Securities Act of 1933, Section 11. However,
Sharp would be unable to prove justifiable reliance on the
misstated information or the existence of scienter; thus, re-
covery under the Securities Exchange Act of 1934, Section
lO(b), Rule IOb-5, is unlikely.
46. (d) If an accountant is negligent, s/he may have
liability not only for a negligently performed audit but also
I
for it negligently performed review when there were facts
that should require the accountant to investigate further be-
cause of their suspicious' nature. This is true even though a
review is not a full audit.
B.4. Statutory Liability to Third Parties-Securities
Exchange Act of 1934
47. (a) In order to establish a case 'under the antifraud
provisions of Section lO(b) and Rule IOb-5 of the 1934 Act,
the plaintiff has to prove that the defendant either had
knowledge of the falsity in the registration statement or
acted with reckless disregard for the truth. In addition, the
plaintiff must show that the transaction involved interstate
commerce so that there is a constitutional basis for using this
federal law. S/he also must prove justifiable reliance. The
plaintiff need not prove that s/he was an intended user of the
false registration statement.
48. (d) Under Rule IOb-5 of Section lO(b) of the Securi-
ties Exchange Act of 1934, a CP A may be liable if s/he
makes a false statement of a material fact or an omission of a
material fact in connection with the purchase or sale of a
security. Scienter is required which is shown by either
knowledge of falsity or reckless disregard for the truth. Of
the four answers given, lack of good faith best describes this
scienter requirement. Answer (a) is incorrect because negli-
gence is not enough under this rule. Answer (b) is incorrect
because independence is not the issue under scienter. An-
swer (c) is incorrect because although due diligence can be a
defense under Section 11 of the Securities Ac\ of 1933, it is
not the standard used under Section 1 O(b) of the Securities
Exchange Act of 1934.
49. (b) Under Section 11 of the Securities Act of 1933,
the CP A may be liable for material misstatements or omis-
sions in certified financial statements. The CP A may escape
liability by showing due diligence. This can often be proven
by the CP A showing that s/he followed Generally Accepted
Accounting Principles. There are not generally accepted
fraud detection standards that the CP A can use as a defense.
50. (c) In a civil suit under Section lO(b) and Rule
IOb-5, the damages are generally the difference between the
amount paid and the market value at the time of suit, or the
difference between the amount paid and the sales price if
sold. Answer (a) is incorrect because recovery of the full
original public offering price is not used as the damages.
Answer (b) is incorrect because the above described mone-
'tary damages are used. Answer (d) is incorrect because pu-
nitive damages are not given under this rule.
c.l. Accountant's Working Papers
51. (b) In general, the accountant's workpapers are
owned by the accountant. However, the CPA's ownership
of the working papers is custodial in nature and the CP A is
required to preserve confidentiality of the client's affairs.
Normally, the CPA firm cannot allow transmission of in-
formation included. in the working papers to third parties
without the client's consent. This prevents a CP A firm from
transferring workpapers to a purchaser of a CP A practice
unless the client consents. Answer (c) is incorrect because
the privileged communication rule does not exist at common
law and has only been enacted by a few states. Addition-
ally, the privileged communications rule only applies to
communications which were intended to be privileged at the