 Hello and welcome to this session in which you would look at the auditor's liability under the Securities Act of 1933, specifically Section 11. Now this topic is covered on the CPA exam under the Regulation section, but also this topic is covered in your auditing course. When you are dealing with the auditor's professional responsibility, you would need to learn about the auditor's CPA-specifically professional liability in your auditing course. So whether you are studying for your CPA exam or your accounting students, I strongly suggest you check out my website farhatlectures.com, especially if you are a CPA candidate. I don't replace your Becker, Roger, Gleam, Wiley or any other review course. I can be a useful addition to your CPA review course. I can add 10 to 15 points by explaining the material differently, no better no less than your CPA review course. You may need this alternative explanation and that I can provide. What is your risk? Well, your risk is one month of subscription. Your potential gain is helping you pass the exam. Are you willing to take that risk by trying me for one month? That's up to you. And if not for anything, check out my website to find out how well or not well your university is doing on the CPA exam. Please check out my other resources for other courses. And by the way, my resources are aligned to go with your CPA review course. So I have it set up exactly like your CPA review course. Connect with me on LinkedIn if you haven't done so and check out my LinkedIn recommendation, like this recording and share it on YouTube. Connect with me on Instagram and Facebook. So let's talk about the 1933. The first thing I want to tell you is every time you think of the 1933 act, think of the Great Depression. Why? The reason is very simple but powerful. You have to understand the 1933 in its context, which is what? Which is we had a Great Depression. Therefore, the laws that we are discussing, they have to be in that historical context. Therefore, you can remember them much easily than just remembering what's the 1933. Okay, so that's the big idea. So remember, the 1933 deals with initial public offering, securities that are issued for the first time. And that's extremely important for the economy. What does that mean? Well, the public lost faith in Wall Street after the Great Depression because people lost their money. Therefore, to give the public that confidence back, the government says, look, we are going to put high burden on the company and obviously on the auditor that's auditing the company. Remember, before you sell your securities to the public, you have to have audited financial statements. And what they said is this, yes, you can have audited financial statement, but listen to us carefully. If there's any problem with those financial statements, the burden of proof is like basically the burden of proof is the person that's going to be damaged, the defendant does not have to have the burden of proof. The burden of proof is basically on the company, on the issuer and on the auditor. So they make it easy for the public to sue the company and sue the auditor. Why? Because the public to have faith in the market, they want the public to invest money. So the economy will start to grow. So that's the idea. So keep that in mind. So the Securities Act of 1933 imposed an unusual burden, notice the word unusual burden on the CPA, which is the auditor. When I say the auditor, it means the CPA. Again, the reason why is because they want to assure the public, look, we are invest your money. If there's any material misstatement, any omission, they're in trouble and will make you hold. And section 11 specifically defines the right of third parties and auditors and CPAs. Okay, the Securities Acts deals only remember with companies reporting for the first time issuing new securities. And remember, companies that are issuing new securities, they have to file the registration statement and they have to give prospectus to the general public. And if you don't know what these statements are, look at the previous recording where we discussed the 1933. Now, bear in mind under the 1933 only the original purchaser of the stocks can sue. So the liability only the original purchaser because remember the 1933 deals with IPOs. Now we're going to look at the 1934 where if you purchase the stock in the secondary market in the next session, we'll talk about this, but here we're dealing specifically under the 1933. Okay, so the original. So what can you recover? Well, your original price, less any value of the securities at the time of the suit. So let's assume you bought the stock for $100 because of material misstatement because of fraud, the stock dropped to 70. Well, your loss is 30, they will make you hold. Okay, and if you sold it, they'll give you the difference, the amount of the difference. If you hold it, you know, they'll give you the difference at the time of the suit took place. Okay, so be simply put, they make you hold. So this way, again, the reason is to encourage you to encourage the public to invest in companies, companies create jobs, the company will will be the that will we can jumpstart the economy. That's the idea. Now let's look specifically under the section 11. Again, it's, it's a low bar for the plaintiff. They make it really easy for the plaintiff. So any party who purchased the shares from the IPO, not not, you know, purchase securities for the first time in the registration statement may sue the auditor for material misstatement or a mission in the audited financial statement. Simply put, that's all what they can do. So third parties who don't have the burden of proof, they don't, they don't have, they don't have to prove that they relied. They don't have to say, look, well, we looked at your financial statement, we rely on them. Therefore, we buy, they don't even have to say this. They don't even have to prove that they relied on the financial statement. As long as the financial statements were materially misstated, you win. Okay, as long as there's a mission, you win, whether you relied on them or not under the 1933, and they don't have to prove that they don't have to prove that the auditor, the CPA was negligent or committed fraud. They don't even have to prove that. All what they have to say is, look, there was material misstatement, a mission, we win. Okay, so users must only prove that they purchased the shares. Obviously, that's easy, that they incur the loss, the stock price went down and that the financial statement, and this is the most important one, contain a material misstatement or a mission. That's all what they have to do. They don't have to show, they don't have to show intent, which is sinister, which we'll talk about this in the next section under the 1934. They don't have to show that the auditor was negligent. The auditor did not do their job. Any causation, you know, the defendant caused this, caused this loss, any reliance, remember, they don't have to show that they relied on anything. Okay, there's a misstatement, we incur the loss, it's your problem under 1933. The only thing good about the 1933 for the auditor is you're only liable responsible for the material misstatement in the part of the statements for which you are responsible. So if you have two auditors, one audited the statement of cash flow, the other one is balance sheet versus income statement, you're only responsible or let's assume you only looked at the legal liabilities. So simply put, your liability is somehow limited because you're not responsible for everything. Now, what can the auditor do, the CPA defense, when they are sued under the 1933? What do you think they can do? Well, the first thing they're going to say is we did our job, we did our due diligence. Okay, the auditor has the burden of demonstrating as a defense that the accountant reasonably believe at the time of the registration that the financial statement did not have material misstatement and they did not have a mission. How can they show this? How can they show this? How can they show that they believe this? Well, simply put, we followed gap and gas, we did our work, we did what we are supposed to do. So that's one defense. Okay. And or what they can show is the plaintiff loss was caused by other factors. Well, the economy tanked. It's not our problem. The stock went down. It's not because there was material misstatement. They will try to show that the loss was due to something else. Remember, because because the plaintiff have to show that they incur the loss, that's fine. But the auditor would say, look, yes, you did incur a loss, but it's not because of the material misstatement because of the industry tank, these the market tank, it's not our problem. Okay, it has nothing to do with the financial statements. Okay. So remember, the 1933 is the only law where the burden of proof is on the defendant, simply put the CPA, they have to prove that they did not do it basically. What other defenses they can raise in case they were sued, the plaintiff knew that the plaintiff knew that the financial statements were wrong, were wrong, they had material misstatement, they knew before buying, so they knew it. The issue is in material, yes, there is some material, there's some misstatement, but the issue is not material, or the emission is not material, or they can say, look, we don't think there's any misstatement or a mission. Again, those are other defenses. And the loss, again, was not caused. We talked about this was not caused by this, by this misstatement, whether it's material or not, it's not, it's not that. Now, understanding this information will help you in your auditing course, because in your auditing course, remember, when you are auditing an IPO, an initial public company, your risk, your audit risk goes up. Why? Because there's more risk, because if you are being sued, you are being sued, the burden of proof is on you, which is that that's bad. You are being sued and you have to show that you are basically innocent. That's how it works. Can the 1933 imposed criminal penalty? Yes, it can. When the auditor knows willfully issue an unqualified financial statements, when they know it's wrong, okay, now we are dealing with fraud, willful violation, then they can go to jail. Otherwise, under section 11, there are civil penalties, but criminal penalties could exist. Now, in the next session, I would look at the liability under the 1934 Act. The reason I want to keep it separate is because I just, I want you to focus on one act at a time. This way, it's much easier to understand rather than giving you both at the same time. At the end of this recording, I would like to remind you again, if you're studying for your CPA exam, I strongly suggest you check out my website. I'm going to be that useful addition. That's all what I'm going to do. I'm not taking, I'm not taking over your course. I can be that alternative explanation for your CPA topics. I do have resources, multiple choice truffles. That's the cream on the cake, but I can give you an alternative explanation. If not for anything, again, check out my website to find out how well is your university doing on the CPA exam. Study hard, good luck, and most importantly, stay safe.