66 MODULE 21 'PROFESSIONAL RESPONSIBILITIES

(1) This is referred to as S-1 review when made for registration statement under securities regula-
tions
EXAMPLE.' An accountant performed an audit and later performed an S-1 review to review events
subsequent to the balance sheet date. The accountant did not detect certain material events during this S-1
review even though there was sufficient evidence to make the accountant suspicious. Further investigation
was required to avoid liability.
'NOTE: This example was based on the case of Escott v. BarChris Construction Corporation.
4. Statutory Liability to Third Parties-Securities Exchange Act of 1934
5. General information on Securities Exchange Act of
1934
(1) Regulates securities sold on national stock exchanges
(a) Includes securities traded over-the-counter and other equity securities where the corpora-
tion has more than $10 million in total assets and the security is held by 500 or
more per-
sons at the end of a fiscal year
(2) Requires each company to furnish to SEC an annual report (Form lO-K)
(a) Includes financial statements (not necessarily the same as an annual report to sharehold-
ers) attested to by an accountant
(b) Accountant civil liability comes from two sections-l0 and 18

1] Section 10 (including Rule lOb-5)-makes it unlawful to

a] Employ any device, scheme, or artifice to defraud
b] Make untrue statement of material fact or omitmaterial fact
c] Engage in act, practice, or course of business to commit fraud or deceit in connec-
tion with purchase or sale of security
2] Section 18-makes it unlawful to make false or misleading statement with respect to a
material statement unless done in "good faith"
6. ~arties who !llay sue
(1) Purchasers and sellers of registered securities
(a) Note that under the 1933 Act, only purchasers may sue
(b) Exchanges and issuances of stock based on merger included in 1934 Act
7. Proof requirements-Section 10, in general including Rule l Ob-S
(1) Plaintiff (purchaser or seller) must prove damages resulted in connection with purchase or sale
of security in interstate commerce
(2) Plaintiff must prove there was a material misstatement or omission in information released by
firm
(a) Information may, for example, be in form of audited financial statements in report to
stockholders or in Form lO-K
(3) Plaintiff must prove justifiable reliance on financial information
(4) Plaintiff must prove existence of scienter (the intent to deceive, manipulate, or defraud)
,(a) Includes reckless disregard of truth or knowledge of falsity
(b) Negligence alone will not subject accountant to liability under this section but lack of
good faith will
(5) Note that these proof requirements differ in very significant ways from proof requirements un-
der the 1933 Act
(6) Plaintiff cannot recover if s/he is reckless or fraudulent
8. Proof requirements-Section 18
(1) Plaintiff (purchaser or seller) must prove
(a) Slhe incurred damages .
(b) There was a material misstatement or omission on report (usually Form lO-K) filed with
SEC
(c) Slhe read and relied on defective report