 Hello and welcome to this session. This is Professor Farhad and this session would look at causes of legal action This is part of the professional liability of auditor This topic is is covered in auditing and attestation course an undergraduate or graduate course And obviously covered on the CPA exam if you want additional lecture about auditing and attestation Please go to my website farhadlectures.com what I have over 170 auditing and attestation in this session We're gonna look at causes of legal action against the auditor when they commit misconduct We have three level under the law for auditor misconduct and we need to distinguish between them and those three are ordinary negligence gross negligence and fraud and the difference between all three is Intent so the main difference between them is intent So let's take a look at what is ordinary negligence? Well, basically ordinary negligence means I was fearless I did not perform my job properly, but I had no intent I did not mean to fool the client and I did not commit a fraud in other words I was not trying to steal money or commit fraud or book the financial statements Basically failure to exercise is a reasonable level of care that causes the damage. Okay Here again, I was careless and the most important thing under ordinary negligence There is no intent to deceive I did not intend to deceive the client or the users of the financial statement Now gross negligence is basically it's a part of negligence, but it's negligence on steroid here Here what I did is I failed you to exercise even the minimal level of care. I was I was really careless here Okay, it's a reckless disregard. It's called reckless disregard. I was really careless But at the same time I had no intent whatsoever to deceive the client or the users of the financial Statements. Okay, the third level is fraud fraud is rare But we have to be aware of fraud is you had the intention you had the intention to miss Mislead someone either the client the users usually the users of the financial statement It's the intentional concealment of mister or misrepresentation of material fact that causes damages to those deceived So you wanted to deceive them and as a result you actually deceive them. Okay, here the plaintiff It's harder for the plaintiff to prove it to prove it But they have to prove the auditor no only deceived deceive them because if you want to tell if you want to claim that they Commit it fraud that it's your responsibility to show that they indeed deceived you. Okay, here You have to act with something called legal jargon called Scienter you have to act it with science or it means the the intention to commit a fraud the intention to commit Now on your opinion which of the three is the easiest for the lawyers to prove Okay, and hopefully, you know the easiest for the lawyers to prove that either ordinary negligence or gross negligence Why because there is no intent you don't have to show intent to deceive now. How do you show? Negligence or gross negligence easy. You just can't show the paperwork you can show from the paperwork that that the auditor was Was careless you did not you did not check all the boxes for example Or you did not carry the steps and the audit program that you wanted to carry show me that you carried it You might have carried it, but you may not documented it. Why because you are careless. Well, that's easy to prove It's not there. I don't see that you documented that step. Well, you acted with carelessness or recklessness, okay? So the paperwork can show this it's easy to prove why you don't have to prove You don't have to prove intent now they're in mind that auditors do sometime very rarely Do commit fraud in one case that most probably you're learning about in your audit course is ESM government securities in Florida And with this story is basically it's a classic story about Auditor actually committing fraud, okay? And that's an interesting case for the auditor the the person that was involved is Jose Gomez And what he did Jose Gomez he was auditing ESM securities and in one year. He missed something He missed one of their inter entity transactions that booked some some some fictitious gains so he missed it then At some point he was talking in front of his client which happens to be ES ESM securities he was selling them that he was gonna be a partner But he's having some financial difficulty because Jose Gomez did not really have good personal finance skills He was selling them that you know, he needed some money to be able to buy his Partners partnership share in Alexander Graham. So guess what ESM securities lend him the money Which is that's a no-no lend him the money to buy his partnership share to become a partner. That's fine so far so good I mean he did violated his independence at this point, but What happened next is Jose discovered in subsequent year discovered that ESM securities was actually committing fraud So he went to the client said okay, hold on a second. I think there's a fraud going on here What's happening and told him yes We've been doing this for the past few years and you've been signing on it now again Jose he was he was not aware of it, but now he's aware of it So so he didn't want to look bad because they started to abuse him to they told him what happened if you go back to your partnership and tell them you missed that transaction and That fraud in the past few years and also what happened if they know that we actually lend you money To buy into the partnership. So basically Jose was part of the fraud and he committed He helped them cover the fraud he covered and covered the frauds for several years And I believe this is a good case for students to view and what I did is I'm gonna I I put the link for the YouTube Alexander Grant CPA partner Jose Gomez said this is the partnership Alexander Grant and he was a partner in the The third ESM securities government ESM government securities So I suggest you view this video just to kind of see Gomez because he's gonna tell the story in his own in his own words of what happened and why he went to jail Okay, if you have any questions any comments by all means email me if you're studying for your CPA exam Study hard and don't be ever in the shoes of Jose Gomez You don't want to be in his shoes ever never but that's why you should see the case. So you would You would learn a little bit more about what you should do under those circumstances If you have any questions once again email me if you happen to visit my website for additional lectures Please consider donating or contributing money and if you're studying for your CPA as always study hard, it's worth it