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Knapp Case 7.5

In: Business and Management

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1. The benefits of courts "socializing" investment losses means that the government gets to share with the public all profits and losses through a variety of legal measures. On the contrary, the costs involve society as a whole becoming much more willing to take risks that shouldn't be taken, the auditors in particular. In this particular case, the auditors claimed to not be liable to the third parties. Because of this, I think the courts should socialize these losses. Since the case of Ultramares Corp. vs. Touche, auditors now bestow a greater care in preparing their reports, which is exactly what they need to present to outside third parties.
2. Under the Securities Exchange Act of 1934 the sale of securities are regulated after their initial issuance, and auditors are subject to the act by auditing the financial statements that are submitted by public companies to the SEC. The Securities Act of 1933 regulates the initial sale of securities, and it subjects auditors when he or she audits the financial statements which then must be submitted with the registration statement to the SEC in order to have the authority to sell securities to the public. These acts are different due to the possibility of the auditor getting sued due to negligence, fraud, or even misleading statements.
3. During the 1920's there was very little regulation of financial statements, due to the lack of enforcing financial disclosures and of preventing fraudulent activity. Once corporations started growing and public ownership of stocks and investments began to increase, the need to further standardized information also grew. That is how the 1933 and 1934 Acts came into being.
4. Generally accepted auditing procedures had not been developed yet during the 1920's. Thus, the balance sheet was considered the most reliable financial source to third parties. The balance sheet was merely…...

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