Use the Internet or visit the Securities and Exchange Websit

Use the Internet or visit the Securities and Exchange Website, located at http://www.sec.gov/, to research at least two (2) sanctions levied against companies that have violated general accounting principles. Next, briefly analyze whether or not investors who were misled by relying on financial statements could hold the audit firm liable for audit failure either by common or securities laws. Provide a rationale for your response.

Solution

Two sanctions levied against companies that have violated general accounting principles are:

1. In 2002 SEC had levied sanction against Xerox for violating general accounting principles. Xerox had accelerated its recognition of equipment revenue by as much as $3 billion with the intention of meeting as well as exceeding Wall Street expectations. In its sanction SEC filed a complaint against Xerox in U.S District Court for the Southern District of New York.

The SEC imposed a bar against a company’s officer and director for periods ranging from 3 years to 5 years. Secondly SEC suspended Romeril and Tayler from either appearing or practicing before SEC as accountants.

2. In the year 2002 another corporation – WorldCom – violated general accounting principles by committing financial fraud. Civil money penalties were imposed on WorldCom. SEC also required WorldCom to appear for hearing to be held under Federal Rule of Bankruptcy Procedure.

As stated in Section 404 of the Sarbanes-Oxley Act of 2002, auditors are required to attest not only to the fairness and representational faithfulness of financial statements, but also the effectiveness of the internal controls system. In case of an audit failure, the auditor may be subject to criminal prosecution, and may face greater legal liability. Thus, investors who were misled by relying on financial statements could hold the audit firm liable for audit failure either by common or securities laws.