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Question & Answer:

  • Match the following terms with their defi nitions:
    ___ A. Term agreement
    ___ B. Apparent authority
    ___ C. Agency at will
    ___ D. A duty of an agent
    ___ E. Implied authority
    1. When two parties make no agreement in advance about the duration of their agreement
    2. When an agent has authority to do acts that are necessary to accomplish an assignment
    3. When two parties agree in advance on the duration of their agreement
    4. When behavior by a principal convinces a third party that the agent is authorized, even though she is not
    5. Duty of loyalty

  • True or False:
    1. A principal is always liable on a contract, whether he is fully disclosed, unidentified, or undisclosed.
    2. When a contract goes wrong, a third party can always recover damages from the agent, whether the principal is fully disclosed, unidentified, or undisclosed.
    3. An agent may receive profits from an agency relationship even if the principal does not know, as long as the principal is not harmed.
    4. An agent may never act for two principals whose interest’s conflict.
    5. An agent has a duty to provide the principal with all information in her possession that she has reason to believe the principal wants to know, even if he does not specifically ask for it.

  • (Multiple-Choice Questions)
    1. A principal will not be liable to a third party for a tort committed by an agent:
    A. Unless the principal instructed the agent to commit the tort
    B. Unless the tort was committed within the scope of the agency relationship
    C. If the agency agreement limits the principal’s liability for the agent’s tort
    D. If the tort is also regarded as a criminal act

    2. Dorris works in Morris’s pet shop. She would not be liable for the following activity:
    A. When a salesperson offers to sell the shop a rare parrot, Dorris buys it for her own account instead.
    B. Dorris got drunk and did obscene parrot imitations in the window of the pet shop.
    C. Morris has been trying to acquire a broad-headed snake for years, but they are an endangered species and therefore cannot be sold. Dorris hates snakes, so she refuses to buy a broad-headed snake when it is offered for sale to the shop.
    D. Dorris tells Morris that there are only 10 gerbils in the shop when really there are 20.
    E. The rhesus monkey needed to take his medication every morning. Dorris forgot one day and the monkey died.

    3. Someone painting the outside of a building you own crashed through a window, injuring a visiting executive. Which of the following questions would your lawyer not need to ask to determine if the painter was your employee?
    A. Did the painter work full-time for you?
    B. Had you checked the painter’s references?
    C. Was the painter paid by the hour or the job?
    D. Were you in the painting business?
    E. Did the painter consider herself your employee?

    4. Which of the following duties does an agent not owe to her principal?
    A. Duty of loyalty
    B. Duty to obey instructions
    C. Duty to reimburse
    D. Duty of care
    E. Duty to provide information

    5. Which of the following activities committed by an agent is not likely to create liability for the principal?
    A. A car accident while driving to work
    B. Accidentally spilling a glass of water in the company cafeteria, causing another employee to fall
    C. Beating up a visitor because he was rude to the company receptionist
    D. A truck accident while driving drunk in the middle of the workday
    E. Accidentally catching the building on fire while taking a smoking break

  • Roy Watson sold vacuum cleaners door-to-door as an independent contractor for T & F. Before hiring Watson, the president of T & F checked with two of his former employers but could not remember if he called Watson’s two references. Watson had an extensive criminal record. T & F granted Watson sales territory that included Neptune City, New Jersey. This city required that all “peddlers” such as Watson be licensed. Applicants for this license were fingerprinted. T & F never insisted that Watson apply for such a license. Watson attacked Miriam Bennett after selling a vacuum cleaner to her at her home in Neptune City. Is T & F liable to Bennett?

  • Radio TV Reports (RTV) was in the business of recording, transcribing, and monitoring radio and video programming for its clients. The Department of Defense (DOD) in Washington, D.C. was one of RTV’s major clients. Paul Ingersoll worked for RTV until August 31. In July, the DOD solicited bids for a new contract for the following year. During this same month, Ingersoll formed his own media monitoring business, Transmedia. RTV and Transmedia were the only two bidders on the DOD contract, which was awarded to Transmedia. Did Ingersoll violate his fiduciary duty to RTV? Aside from his legal obligations, did Ingersoll behave ethically? How does his behavior look in the light of day? Was it right?

  • Sara Kearns went to an auction at Christie’s to bid on a tapestry for her employer, Nardin Fine Arts Gallery. The good news is that she purchased a Dufy tapestry for $77,000. The bad news is that it was not the one her employer had told her to buy. In the excitement of the auction, she forgot her instructions. Nardin refused to pay, and Christie’s filed suit. Is Nardin liable for the unauthorized act of its agent?

  • Jack and Rita Powers purchased 312 head of cattle at an auction conducted by Coffeyville Livestock Sales Co. They did not know who owned the cattle they bought. The Powers, in turn, sold 159 of this lot to Leonard Hoefling. He sued the Powers, alleging the cattle were diseased and dying in large numbers, and recovered $38,360. Are the Powers entitled to reimbursement from Coffeyville?

  • This is a tale of marital woe. At the urging of her husband, Phyllis Thropp placed $40,000 in a brokerage account with her husband’s friend Richard Gregory, a broker at Bache Halsey. Mrs. Thropp opened the account in her name alone and did not authorize Gregory to discuss the account with Mr. Thropp, nor did she authorize Mr. Thropp to act for her. Undeterred by this technicality, Mr. Thropp forged his wife’s name to a power of attorney that authorized him to make decisions for her. He gave this document to Gregory. In the course of the next year, Mr. Thropp ordered Gregory to sell his wife’s securities and issue checks to her. After forging her name to the checks, he cashed them and used the money to pay his gambling debts. Gregory did not process the power of attorney form according to standard Bache procedures. When the Thropps saw Gregory socially, Mrs. Thropp frequently asked him how her account was doing. Gregory somehow neglected to mention that it was not doing very well at all. He never told her about the numerous sales. Can this marriage be saved? No, the Thropps were divorced. Did Richard Gregory violate his fiduciary duty to Mrs. Thropp?

  • 1. Antonia wants to buy a car. The dealer permits her to take an automobile home to show her mother. On the way home, she gets into an accident. Is Antonia an agent for the dealer? (If she is, the dealer is liable for the damage she caused.)
    2. Suppose that Martin asks Beverly to return a shirt to the store where he recently purchased it. Is she an agent for Martin? Does it matter that he is not paying her?
    3. What about a truck driver who agrees to make a detour to take a hitchhiker to her destination? Is the truck driver an agent of the passenger?

  • Match the following terms with their definitions:
    ___ A. GAAS
    ___ B. Tracing
    ___ C. Qualified opinion
    ___ D. GAAP
    ___ E. Vouching
    ___ F. Unqualified opinion
    1. Rules for preparing financial statements
    2. When accountants check backwards to ensure there are data to support a transaction
    3. Clean opinion
    4. Rules for conducting audits
    5. When accountants check a transaction forward to ensure it has been properly recorded
    6. When there is some uncertainty in the financial statements

  • True or False:
    1. Auditors are only liable under the 1933 Act if they intentionally misrepresent financial statements.
    2. Auditors generally are not liable if they follow GAAP and GAAS.
    3. Accountants are prohibited under federal law from disclosing a client’s confidential information.
    4. If auditors discover that company officers have committed an illegal act, they must immediately report this wrongdoing to the SEC.
    5. Under federal law, accounting firms may not provide any consulting services to companies that they audit.

  • 1. To be successful in a suit under the Securities Act of 1933, the plaintiff must prove
    Mistake in the Plaintiff
    Registration Lost
    Statement Money
    A. No ........Yes
    B. No .........No
    C. Yes ........No
    D. Yes .......Yes

    2. An accountant is liable to a client for conducting an audit negligently if the accountant:
    A. Acted with intent
    B. Was a fiduciary of the client
    C. Failed to exercise due care
    D. Executed an engagement letter

    3. Which of the following statements about Sarbanes-Oxley is not true?
    A. All accounting firms that audit public companies must register with the PCAOB.
    B. Auditors must report to the CEO of the company they are auditing.
    C. Auditing firms cannot base their employees’ compensation on sales of consulting services to clients.
    D. An accounting firm cannot audit a company if one of the client’s top officers has worked for that firm within the prior year and was involved in the company’s audit.
    E. Every five years, the lead audit partner must rotate off an audit account.

    4. For a client to prove a case of fraud against an accountant, the following element is not required:
    A. The client lost money.
    B. The accountant made a false statement of fact.
    C. The client relied on the false statement.
    D. The accountant knew the statement was false.
    E. The accountant was reckless.

    5. Dusty is trying to buy an office building to house his growing consulting firm. When Luke, a landlord, asks to see a set of financials, Dusty asks his accountant Ellen to prepare a set for Luke. Dusty shows these financials to a number of landlords, including Carter. Dusty rents from Carter. Ellen has been careless and the financials are inaccurate.
    Dusty cannot pay his rent and Carter files suit against Ellen. Which of the following statements is true?
    A. Carter will win because Ellen was careless.
    B. Carter will win because Ellen knew that landlords would see the financials.
    C. Carter will win because Ellen was careless and she knew that landlords would see the financials.
    D. Carter will lose because Ellen did not know that he would see the financials.
    E. Carter will lose because he had no contract with Ellen.

    6. Ted prepared fraudulent financial statements for the Arbor Corp. Lacy read these statements before purchasing stock in the company. When Arbor goes bankrupt, Lacy sues Ted.
    A. Lacy will win because it was foreseeable that she would rely on these statements.
    B. Lacy will win because Ted was negligent.
    C. Lacy will lose because she did not rely on these statements.
    D. Lacy will lose because it was not foreseeable and she did not rely on these statements.
    E. Lacy will lose because it was not foreseeable that she would rely on these statements.

  • Color-Dyne printed patterns on carpets. After reviewing the company’s audited financial statements, the plaintiff s provided materials to Color-Dyne on credit. These financial statements showed that Color- Dyne owned $2 million in inventory. The audit failed to reveal, however, that various banks held secured interests in this inventory. The accountant did not know that the company intended to give the financial statements to plaintiff s or any other creditors. Color-Dyne went bankrupt. Is the accountant liable to plaintiffs?

  • James and Penelope Monroe purchased securities offered by Hughes Homes, Inc., a retailer of manufactured housing in Tacoma, Washington. During its audit, Deloitte & Touche found that Hughes Homes’ internal controls had flaws. As a result, the accounting firm adjusted the scope of its audit to perform independent testing to verify the accuracy of the company’s financial records. Satisfied that the internal controls were functional, Deloitte issued a clean opinion. After Hughes Homes went bankrupt, the Monroes sued Deloitte for violating the 1933 Act. They alleged that Deloitte’s failure to disclose that it had found flaws in Hughes’s internal control system was a material omission. GAAS did not require disclosure. Is Deloitte liable?

  • The British Broadcasting Corp. (BBC) broadcast a TV program alleging that Terry Venables, a former professional soccer coach, had fraudulently obtained a £1 million loan by misrepresenting the value of his company. Venables had been a sportscaster for the BBC but had switched to a competing network. The source of the BBC’s story was “confidential working papers” from Venables’s accountant. According to the accountant, the papers had been stolen. Who owns these working papers? Does the accountant have the right to disclose the content of working papers?

  • Medtrans, an ambulance company, was unable to pay its bills. In need of cash, it signed an engagement letter with Deloitte & Touche to perform an audit that could be used to attract investors. Unfortunately, the audit had the opposite effect. The unaudited statements showed earnings of $1.9 million, but the accountants calculated that the company had actually lost about $500,000. While in the process of negotiating adjustments to the financials, Deloitte resigned.
    Some time passed before Medtrans found another auditor, and, in that interim, a potential investor withdrew its $10 million offer. Is Deloitte liable for breach of contract?

  • 1. As this example illustrates, what is the advantage of using GAAP?
    2. What is the moral of this story?

  • 1. Is GAAP enough to protect investors?
    2. Is there a solution to this problem?

  • 1. What does “material” mean?
    2. What is the problem with this kind of manipulation?

  • What else could the firm have done?