Tag: Mumbai University BMS Notes Download

Many countries have broad laws that protect consumers and regulate how companies operate their businesses. The goal of these laws is to provide an equal playing field for similar businesses that operate in a specific industry while preventing them from gaining too much power over their competition. Simply put, they stop businesses from playing dirty in order to make a profit. These are called antitrust laws.

In the United States, antitrust law is a collection of federal and state government laws that regulate the conduct and organization of business corporations and are generally intended to promote competition and prevent monopolies. The main statutes are the Sherman Act of 1890, the Clayton Act of 1914 and the Federal Trade Commission Act of 1914. These Acts serve three major functions. First, Section 1 of the Sherman Act prohibits price fixing and the operation of cartels, and prohibits other collusive practices that unreasonably restrain trade. Second, Section 7 of the Clayton Act restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly. Third, Section 2 of the Sherman Act prohibits monopolization.

Federal antitrust laws provide for both civil and criminal enforcement of antitrust laws. The Federal Trade Commission, the Antitrust Division of the U.S. Department of Justice, and private parties who are sufficiently affected may all bring civil actions in the courts to enforce the antitrust laws. However, criminal antitrust enforcement is done only by the Justice Department. U.S. states also have antitrust statutes that govern commerce occurring solely within their state borders.

The scope of antitrust laws, and the degree to which they should interfere in an enterprise’s freedom to conduct business, or to protect smaller businesses, communities and consumers, are strongly debated. Some economists argue that antitrust laws, in effect, impede competition, and discourage businesses from activities that would be beneficial to society. One view suggests that antitrust laws should focus solely on the benefits to consumers and overall efficiency, while a broad range of legal and economic theory sees the role of antitrust laws as also controlling economic power in the public interest. A survey of 568 member economists of the American Economic Association (AEA) in 2011 found a near-universal consensus, in that 87 percent of respondents broadly agreed with the statement “Antitrust laws should be enforced vigorously.”

Monopolies

Usually, when most people hear the term “antitrust” they think of monopolies. Monopolies refer to the dominance of an industry or sector by one company or firm while cutting out the competition.

One of the most well-known antitrust cases in recent memory involved Microsoft, which was found guilty of anti-competitive, monopolizing actions by forcing its own web browsers upon computers that had installed the Windows operating system.

Regulators must also ensure monopolies are not borne out of a naturally competitive environment and gained market share simply through business acumen and innovation. It’s only acquiring market share through exclusionary or predatory practices that is illegal.

Tying the Sale of Two Products: When a monopolist has dominance in the market shares of one product but wishes to gain market shares in another product, it can tie sales of the dominant product to the second product. This forces customers for the second product to buy something they may not need or want and is a violation of antitrust laws.

Exclusive Supply Agreements: These occur when a supplier is prevented from selling to different buyers. This stifles competition against the monopolist as the company will be able to buy supplies at potentially lower costs and prevent competitors from manufacturing similar products.

Predatory Pricing: Often hard to prove, and requiring a careful examination on the part of the FTC, predatory pricing can be considered monopolistic if the price cutting firm can cut prices far into the future and has enough market share to recoup its losses down the line.

Refusal to Deal: Like any other company, monopolies can choose who they wish to conduct business with. However, if they use their market dominance to prevent competition, this can be considered a violation of antitrust laws.

Price Fixing

Price fixing occurs when the price of a product or service is set by a business intentionally rather than letting market forces determine it naturally. Several businesses may come together to fix prices to ensure profitability.

Say my company and yours are the only two companies in our industry, and our products are so similar that the consumer is indifferent between the two except for the price. In order to avoid a price war, we sell our products at the same price to maintain margin, resulting in higher costs than the consumer would otherwise pay.

Bid Rigging

The illegal practice between two or more parties who collude to choose who will win a contract is called bid rigging. When making bids, the “losing” parties will purposely make lower bids in order to allow the “winner” to succeed in securing the deal. This practice is a felony in the U.S. and comes with fines even jail time.

There are three companies in an industry, and all three decide to quietly operate as a cartel. Company 1 will win the current auction, so long as it allows Company 2 to win the next and Company 3 to win the one after that. Each company plays this game so they all retain current market share and price, thereby preventing competition.

Bid rigging can be further divided into the following forms: bid suppression, complementary bidding, and bid rotation.

Complementary Bidding: Also known as cover or courtesy bidding, complementary bidding happens when competitors collude to submit unacceptably high bids for the buyer or include special provisions in the bid that effectively nullify the bids. Complementary bids are the most frequent of bid-rigging schemes and are designed to defraud purchasers by creating the illusion of a genuinely competitive bidding environment.

Bid Suppression: Competitors refrain from bidding or withdraw a bid so a designated winner’s bid is accepted.

Bid Rotation: In bid rotations, competitors take turns being the lowest bidder on a variety of contract specifications, such as contract sizes and volumes. Strict bid rotation patterns violate the law of chance and signal the presence of collusion activity.

Market Allocation

Market allocation is a scheme devised by two entities to keep their business activities to specific geographic territories or types of customers. This scheme can also be called a regional monopoly.

Suppose my company operates in the Northeast and your company does business in the Southwest. If you agree to stay out of my territory, I won’t enter yours, and because the costs of doing business are so high that startups have no chance of competing, we both have a de facto monopoly.

Sole Proprietorships

Sole proprietorship is the simplest organizational structure available for businesses, according to Entrepreneur magazine. According to the IRS, it is the most common form of business in the U.S. Businesses structured as a sole proprietorship allows the owners to have total control over company operations. Businesses that typically form sole proprietorships are home-based businesses, shop or retail businesses and one-person consulting firms.

Owners of sole proprietor businesses are responsible for their own record keeping and paying the IRS in the form of self-employment taxes. However, this type of business provides no protection for business owners, as they can be held personally responsible for their company’s debt and financial obligations.

Out of the Different Corporate Structures in the USA, when a business is incorporated as a sole proprietorship, it allows the owners of such business to have total control over company operations and management. The types of companies that typically form Sole Proprietorships in the USA are a shop or retail businesses, and one-person consulting firms, and home-based businesses.

Partnerships

A partnership is formed when two or more people join, or partner, together to run a business, explains Knew Money.com. Each partner has equal share in the net profits and losses of their business. Like a sole proprietor, each partner reports their income on their personal tax return and pays self-employment taxes to the IRS.

They are also personally liable for financial debt and obligations of their company and also the actions of other partners. Although partnerships can be formed through oral agreements and handshakes, written agreements can be the best option in the event of disputes or lawsuits between partners.

The agreement of Partnership is required to state in detail how the profits and losses are to be distributed among partners. If any written agreement is not created by the partners, then the law of Partnership laws of the state will govern the operations of the Partnership. Making the Partnership agreement will allow the partners of the Partnership an opportunity to clearly spell out the expectations that they have from each other while working.

There are three kinds of Different Partnership Corporate Structures in the USA, which are as follows:

• General Partnership
• Limited Partnership
• Joint Venture

Corporations

The most complex organizational structure for businesses is the corporation. This type of business structure separates the liabilities and obligations incurred by company operations from being the responsibility of the owners. Corporations are regulated by the laws of the state they are set up in.

Unlike sole proprietor and partnership businesses, corporations are taxed as separate entities at corporate tax rates. The IRS taxes corporation owners at individual tax rates. There are two common types of corporation structures: Subchapter C and S. The different between the two subchapters stem from different tax rules. Ordinary corporations are considered Subchapter C corporations.

Subchapter S corporations, unlike Subchapter C companies, can pass income and losses onto their shareholders to avoid paying federal income taxes. This prevents double taxation of corporation profits.

Corporation

The advantages of Corporation in the USA are as follows:

• A Corporation that is publicly held can raise substantial amounts of capital by issuing bonds or selling shares.
• The shareholders of a Corporation in the USA are only liable up to the amount of their investments in it.
• The ownership can be easily transferred to a Corporation in the USA.
• There is no limit to the life of a Corporation in the USA. The ownership of Corporations can pass through many generations of investors or members.
• In the case a Corporation is structured as an S Corporation, losses and profits are passed through to the members or shareholders. Hence, the Corporation is not required to pay the income tax.

An accountant’s liability describes the legal liability assumed while performing professional duties. An accountant is liable for a client’s accounting misstatements. This risk of being responsible for fraud or misstatement forces accountants to be knowledgeable and employ all applicable accounting standards.

An accountant who is negligible in their examination of a company can face legal charges from either the company, investors, or creditors that rely on the accountant’s work. The accountant could also be responsible for the financial losses incurred from any incorrect representation of a company’s books. This possible negative scenario often leads to accountants taking out professional liability insurance.

Whether providing services as an accountant or auditor, a certified public accountant (CPA) owes a duty of care to the client and third parties who foreseeably rely on the accountant’s work. Accountants can be sued for negligence or malpractice in the performance of their duties, and for fraud.

Liability to clients

CPAs have an obligation to their clients to exercise due professional care. With an engagement letter, it provides the client and other third parties with rights of recovery. Therefore, if the CPAs are not performing within the agreement set forth in the contract this will be considered a breach of contract. The clients may also claim negligence against the CPAs if the work was performed but contained errors or was not done professionally. This is considered a tort action.

In order to recover from an auditor under common law negligence theory, the client must prove:

• Duty of care
• Breach of Duty
• Losses
• Causation

CPAs may defend against a breach of contract if they can prove that the client’s loss occurred because of factors other than negligence by the auditors. If the auditor proves the loss resulted from causes other than the auditor’s negligence, a client may be accused of contributory negligence. If a state follows the doctrine of contributory negligence, the auditor may eliminate their liability to the client based on contributory negligence by the client. Many states do not follow this doctrine. Most states permit a jury to assess the fault and apply the correct percentage of fault to the parties involved. This is called comparative negligence.

Rosenblum (foreseeable user) approach

The “reasonably foreseeable” approach which was created due to Rosenblum v. Adler. This method is very liberal and broad in terms of scope, unlike the privity approach. This system holds an auditor liable to all third parties that rely on financial statements.

Restatement of Torts (foreseen user) approach

The “foreseen” or “Restatement Standard” approach was established by the American Law Institute’s (ALI) Second Restatement of Law of Torts. With this approach the auditor is liable to all third parties in which their reliance is foreseen even if the auditor doesn’t know the third party. This approach came about due to Rusch Factors, Inc. v. Levin. In this case, the CPA was found accountable for ordinary negligence to the third party who had not been specifically identified but the CPA was aware that the financial statements were to be used by this party.

Ultramares (known user) approach

In order for the court to decide if the auditor’s duty actually extended to the third party, for ordinary negligence, there are four legal approaches each state could follow. First is the Privity approach, which states the auditor is liable to a third party if an existence of a contract is in existence. This approach was established in Ultramares Corporation v. Touche and is the most limiting approach in respect to scope. Ultramares occurred in 1933 where the defendant CPA distributed an unqualified opinion on the balance sheet of a company. In addition to the CPAs estimations, Ultramares wrote out several loans to the company shortly before the company declared bankruptcy. Ultramares sued the CPA for ordinary negligence. The New York Court of Appeals ruled that CPAs are held accountable for ordinary negligence to their clients and third parties who identify themselves as users of the CPAs reports.

Liability to third parties

Not all suits brought to an auditor are from a direct client. Third parties can also sue an auditor for fraud, in which case a contract (privity) is necessary. In order for a third party to prevail in a case, there are a number of things they must prove. First, the third party must prove that the auditor had a duty to exercise due care. Second, the third party must prove that the auditor breached that duty knowingly. Third, the third party must prove that the auditor’s breach was the direct reason for the loss. Finally, the third party must prove that they suffered an actual loss.

Statutory liability

Statutory law consists of written laws created by legislative bodies. Lawsuits brought against auditors based on statutory provisions differ from those under common law. Common law theories of liability may evolve or change over time, and interpretation and application may differ between jurisdictions, while statutory law is constrained to a greater degree by the text of the underlying statute.

Communications between an accountant and his client are, likewise, confidential; and, in some, but not all, states, are treated as privileged and may not be disclosed without the client’s permission. However, in many cases, they still may be disclosed under court order. THIS IS NOT THE SAME AS AN ATTORNEY/CLIENT PRIVILEGE. There is also a limited privilege for certain non criminal tax matters and work papers.

The Securities Act of 1933. Criminality under this act relates to the fiduciary duty of auditors acting in a professional capacity for publicly held companies. Before any business can register to sell stock, an audit of financial records and other legal disclosures must be performed by a CPA. In order to avoid criminal liability under the Securities Act, the auditor must report any fraud or other criminal activity to the company’s board or the SEC, in cases of severe financial crimes.

With regard to the sale of unregistered securities, it is not uncommon for an accountant to become involved in the business opportunity of a client and assume a role as a partner or salesperson of investment vehicles.

However, when this happens, it is an invitation for disaster, and the opportunity for bad endings expands exponentially. So, any relationship beyond the accountant/client one should be approached with great care.

As a small firm or sole practitioner, you may not have the resources in place that a large firm has or have a corporate lawyer to protect you. Common sense and experience are going to be your best defenses against criminal exposure. If a client seems shady or asks you to do something unethical, there’s no law saying you have to work for them. Keep in mind you can still be considered civilly negligent if irregularities escape your attention.

You can also avoid problems at the outset by drafting engagement letters for each client that clearly outline your duties, responsibilities and legal obligations. For added protection, most accountants carry liability insurance. Aside from a general liability policy any business owner should have, look into an Errors and Omissions policy or accounting crime insurance.

When reconciling accounts or preparing financial statements uncovers inaccuracies or suspicious activity, ask questions to determine if it’s just an oversight that’s easily rectified or an attempt to misrepresent income. Reluctance to provide requested information or avoidance of sensitive conversations may indicate the need to reevaluate your relationship with your client.

When you suspect your client is breaking the law and placing you in jeopardy, your first instinct may be to ask another accountant for advice. Be aware they also have a duty to report crimes, and they’re not bound by any sort of confidentiality. The same goes for family members or friends, who also might be drawn into legal trouble by having knowledge of a crime.

Your best defense is talking to a lawyer who handles criminal financial matters. They can advise you about how to proceed in order to minimize your legal exposure, and anything you tell them is completely confidential.

Looking the other way when a client is involved in shady activities will do more than just affect your professional reputation; it could cost you your professional certification or worse, your freedom.

As the accountant or auditor of record, you must be aware of financial crimes of your clients. Knowing what to look for and how to mitigate potential pitfalls will keep you in good stead with regulators and out of disastrous criminal proceedings.

“No potential legal hazard has so surprised and alarmed the public accounting profession as the spectre of criminal liability.” So wrote accounting scholars Paul Hooper and John Page in 1984. The exposure of accountants to the risk of criminal penalties is expanding.

In general, most criminal liability actions against accountants were brought under the federal securities laws, most notably under Sec. 24 of the 1933 Act and Sec. 32(a) of the 1934 Act. The Federal Mail Fraud Statute also is a principal source of criminal liability for auditors. Lately, the accounting profession is  concerned with suits brought under the Racketeer Influenced and Corrupt Organizations Act (RICO).

Both Secs. 24 (33 Act) and 32 (34 Act) make willful violations of any provision, rule, or regulation of the respective acts a crime. However, unlike Sec. 24, Sec. 32 uses the word “knowingly” in conjunction with “willfully.” Whether the two words are to be construed as synonymous is the subject of debate. However, regardless of whether these two terms are interpreted independently or together, it appears well settled that in a prosecution under either section, a specific intent on the part of the defendant to violate the law need not be shown. In a prosecution under the “willfully knowing” standard of Sec. 32(a), an evil purpose on the part of the defendant must usually be established.

Case law under the criminal provisions of the federal securities laws reveals a tendency toward increasing criminal liability for accountants. In United States v. Benjamin,10 the United States Court of Appeals for the Second Circuit held that an accountant cannot “shut his eyes” in the presence of fraud. Benjamin involved a prosecution against a certified public accountant who, after preparing pro forma statements relating to his client’s financial status, falsely reported that certain assets existed, when no procedures for verification or examination had been used. Responding to the argument that the evidence adduced at trial was insufficient to establish the defendant’s criminal state of mind, Judge

Friendly held that: The government may meet its burden by proving that a defendant closed his eyes to facts he had a duty to see… or recklessly stated as facts things of which he was ignorant .. . Congress .. . could have intended that men holding themselves out as members of .. . ancient professions should be able to escape criminal liability on a plea of ignorance when they have shut their eyes to what was plainly to be seen, or have represented a knowledge they knew they did not possess.

Supreme Court Standard 503, Lawyer-Client Privilege, says a client has a privilege to refuse to disclose, and to prevent others from disclosing, confidential communications made for the purpose of facilitating the provision of legal services to the client. The communications can be:

• Between the client or the clients representative and his or her lawyer or the client’s lawyer’s representative.
• Between the client’s lawyer and that lawyer’s representative.
• Made by the client and his or her lawyer representing another in a matter of common interest.
• Between representatives of the client.
• Between lawyers representing the client.

An attorney owes her client the duty to provide competent and diligent representation.

An attorney must know well-settled principles of law applicable to a case and discover what law can be found through a reasonable amount of research.

An attorney’s competence and diligence are judged against those of a reasonably competent general practitioner of ordinary skill, experience, and capacity, ups the attorney holds herself out as being expert in some area of law, in which case she is held to the higher standard of care expected of a reasonably competent expert practitioner in that area of the law.

Restatement Rule Section 552(2) of the Restatement (Second) of Torts extends the “Ultra mares Rule,” holding that accountants are also liable to third parties

• For whose benefit and guidance, the accountant intends to supply the information or knows that the recipient intends to supply it; or
• Whom the account intends the information to influence of knows that the recipient so intends.

Reasonably Foreseeable Users: A minority of courts hold accountants liable to any user whose reliance on the accountant’s report was reasonably foreseeable to the accountant at the time she prepared the report.

Due Diligence Defense: An accountant can avoid Section 11 liability if he can show that, after reasonable investigation, he had reasonable grounds to believe, and did believe, that the financial statements were true and complete at the time the accountant made them.

A case for applying attorney-client privilege to accountants can be made when

• An attorney-client relationship exists.
• An accountant is retained by the attorney.
• The accountant renders services that abet the provision of legal services.
• The parties do not waive the privilege.

Diversified standard, the attorney client privilege applies to an employees communications if

• The communication was made to get legal advice.
• The employee making the communication did so at the direction of his or her corporate superior.
• The superior made the request so the corporation could get legal advice.
• The subject of the communication is within the scope of the employees corporate duties.
• The communication was not shared with anyone other than those who, because of the corporate structure, needed to know its contents.

The Statute

The I.R.C. extends “the same common law protections of confidentiality . . . to a communication between a taxpayer and any federally-authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.” Remarkably, however, the privilege does not apply to the preparation of a tax return. That, of course, raises the question of what exactly it covers.

The privilege extends only to tax advice, which has been defined as advice given by a federally-authorized tax practitioner within the scope of their authority under 31 U.S.C.A. § 330. In this respect, it is important for practitioners to distinguish between the tax advice covered by the privilege, and general business or financial planning advice which is not covered by the privilege. Importantly, the privilege is not available where it is needed most: it cannot be used in a criminal proceeding. Nor can it be used in state court proceedings (such as a divorce or civil suit). It can only be asserted in a noncriminal tax proceeding before the IRS or in a noncriminal tax proceeding in federal court.

Exceptions

Even where it otherwise applies, there are two notable exceptions to this privilege. First, there is a crime-fraud exception. Where communication is made in furtherance of a crime or fraud, the communication may not be privileged. Another notable exception to the privilege is statutory. Under I.R.C. § 7525(b), any written communication “in connection with the promotion of the direct or indirect participation of the person in any tax shelter” is not privileged.