Ethics Essay #6

ACT560 Part 1b Module 6 Critical Thinking Ethical Questions 1. Distinguish between common law liability and statutory liability for auditors. What is the basis for the difference in liability? 2. Distinguish between the legal concepts of actually foreseen third party users and reasonably foreseeable third party users. How does each concept establish a basis for an auditor's legal liability to third parties? 3. What are the legal requirements for a third party to sue an auditor under Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934? How do these requirements relate to the Hochfelder decision? 4. Distinguish between legal and illegal insider trading. Evaluate the ethics of the practice. 5. Question 5 requires you to do some research about provisions in the Private Securities Litigation Reform Act with respect to forward-looking information. Forward-looking information is probably most evident in the management's discussion and analysis (MD&A) that is included with any SEC filing containing a financial statement. In MD&A, companies discuss information currently known to management that could materially impact key trends embodied in the company's financial statements. Clearly, this requirement calls upon management to make forward-looking projections. Additionally, the SEC's expanded disclosure requirements calling for increased quantitative and qualitative information about market risk call for companies to include forward-looking information about their market-risk sensitive financial instruments and derivatives. Give two examples of “forward-looking” information and why they are considered to be important enough to include in the MD&A. What are the auditor’s professional and ethical responsibilities to audit such information?