[Anonymous]

First off thanks in advance for any thoughts

Probably reading too much into this but anyway I know that a plaintiff in a securities suit re the Act of ’33 has to prove, he bought the security, suffered a loss and there was a material misstatement, therefore doesn’t have to prove negligence. Yet in the Wiley Test Bank text they state Due Diligence as a defense (which Ive seen before) see their text below

1] “Due diligence,” that is, after reasonable investigation, the accountant had reasonable grounds to believe and did believe that statements were not materially misstated.

NOTE: Although the basis of liability is not negligence, an accountant who was at least negligent will probably not be able to establish “due diligence.”

And again later on they state The plaintiff need not prove negligence or fraud.

Seems like if you say hey Im not liable I performed my Due Diligence ie I wasn’t negligent but yet negligence isn’t required……as stated, it seems if there was a material mistake, I bought the shares, I suffered damages you, accountant, are liable Due Diligence ie Negligence or not. Period.

What am I missing?

[Anonymous]

All Due Diligence means is that it wasn't my fault. Meaning…. you purchased the security, suffered a loss and there was a material misstatement, but guess what? It ain't my fault! So, I'm not liable!!

[Anonymous]

Yeah thanks. Any other thought? not a big deal I know what the answer should be if it comes up on the exam it is Due Diligence I really am just curious. I dont think Due Dillgence strictly means “its not my fault” in fact it means I did what was proper and there are reasonable grounds to believe accuracy but there was in fact a material mistatement despite these efforts.

For what its worth when Google'ing this I came across “Auditors may also be held liable to third parties under the federal securities laws, which allow class action lawsuits by purchasers or sellers of a company's securities. The Securities Act of 1933 is unique in that most of the burden of proof in litigation is shifted to the auditors, with the primary defenses available to the auditor consisting of (1) knowledge of the plaintiffs of the errors or omissions or (2) due diligence by the auditors. **Due diligence is a difficult defense to establish.**”

I think for the reason I stated above. Its defintely nuanced, nevermind carryon

[Anonymous]

For the plaintiff to sue you, they only have to prove those 3 things….they purchased the security, there was material misstatement and they suffered a loss. In the event you do get sued due to those three things, you, as a CPA, can use Due Diligence as a defense. So, Due Diligence is not required for a plaintiff to sue, but the CPA can use it to defend him/herself if the plaintiff takes action against the CPA.

That's all I can really say on this. Maybe someone else can help me out…

[Anonymous]

My thoughts…the CPA can use “due diligence” as a defense, meaning that they followed GAAP and/or GAAS. If they didn't follow GAAP or GAAS then they were negligent (most likely).

[Anonymous]

Great thanks all, Im pretty clear on it I think my question was a bit more of an intellectual exercise, not necesarry for this sorry

[Author]

Replies