| Course | ACC 645 Advanced Auditing |
|---|---|
| Module | Module 1 |
| Paper type | graduate discussion post on auditor legal liability |
| Length | About 380 words, 3 pages |
| Format | APA 7 student paper |
| School | Southern New Hampshire University |
| Program | MS Accounting |
| Updated | October 2026 |
Free sample paper for ACC 645 Module 1
Module One Discussion
Section 11, Rule 10b-5 and a Restated Commission Asset
Suppose the payroll software company I am following this term announces that it capitalized sales commissions on renewals that should have been expensed, restates two years, and its shares fall 31 percent. Two groups of investors sue the company and its auditor: those who bought shares in a secondary offering last spring, and those who bought on the open market. The auditor's exposure is very different for the two groups.
The offering buyers can sue under Section 11 of the Securities Act of 1933, because the offering's registration statement included the audited financial statements. They need only show a material misstatement; they do not have to prove they relied on the statements or that the auditor was careless. The burden shifts to the auditor to prove due diligence: that after reasonable investigation it had reasonable grounds to believe the statements were fairly stated. Arens et al. (2020) describe this as the most demanding standard auditors face.
The open-market buyers must sue under Rule 10b-5 of the Securities Exchange Act of 1934. They must prove a material misstatement, reliance, which courts often presume in efficient markets, loss and causation, and, critically, scienter: that the auditor knew of the misstatement or was reckless. Negligence alone is not enough. Since the Private Securities Litigation Reform Act of 1995, an auditor found liable without knowing fraud generally pays only its proportionate share of damages.
Outside the securities acts, a lender suing under common law faces whichever test its state uses: strict privity in a few states, the foreseen user approach of the Restatement of Torts in most, or broad foreseeability in a few.
Does all this improve audits? Palmrose (1988) found that auditors with higher quality reputations faced fewer lawsuits, and Lennox and Li (2014) found that after an audit firm was sued, its other clients had fewer misstatements, consistent with litigation pushing firms to tighten their work. I think the stricter Section 11 standard is justified for offerings, when investors rely most directly on audited numbers.
For classmates: is it fair that the same audit work exposes the auditor to strict liability for one group of investors and only a scienter standard for another, and which rule would you apply to both?
References
Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2020). Auditing and assurance services (17th ed.). Pearson.
Lennox, C., & Li, B. (2014). Accounting misstatements following lawsuits against auditors. Journal of Accounting and Economics, 57(1), 58-75. https://doi.org/10.1016/j.jacceco.2013.10.002
Palmrose, Z.-V. (1988). An analysis of auditor litigation and audit service quality. The Accounting Review, 63(1), 55-73.
What the ACC 645 Module 1 instructions ask for
The first ACC 645 discussion usually asks about auditor legal liability: liability to clients and third parties under common law, liability under the Securities Act of 1933 and the Securities Exchange Act of 1934, the defenses available and how reforms such as the Private Securities Litigation Reform Act changed exposure. Three or four paragraphs supported by the textbook and research, plus replies, is the usual length. Strong posts apply the frameworks to a specific scenario and compare what a plaintiff must prove under each, rather than listing the laws. Some prompts ask whether liability improves audit quality or merely raises costs, which invites a position backed by evidence. A hypothetical company makes the comparison concrete.
How this ACC 645 Module 1 discussion example is built
The post imagines that the payroll company restated two years of capitalized sales commissions, its share price fell 31 percent and investors sued the company and its auditor. It explains that investors who bought in a secondary offering covered by a registration statement can sue under Section 11 of the 1933 Act without proving reliance or fault, leaving the auditor to prove due diligence, while open-market buyers must sue under Rule 10b-5 and prove scienter. It notes the narrower common law tests for third parties and proportionate liability under the 1995 reform. It cites Palmrose and Lennox and Li on litigation and quality, takes the view that the stricter offering standard is justified, and asks classmates which rule strikes the right balance.
Where the ACC 645 Module 1 rubric puts the points
Scoring for the liability discussion typically weighs accuracy on the common law and statutory frameworks, application to a scenario, comparison of burdens of proof and defenses, use of research and engagement with classmates. Graduate-level posts explain why the two securities acts differ and what that means for an auditor's exposure in a particular transaction, and they take a position on whether liability improves audits. Posts that list laws without applying them, or that confuse negligence with fraud, score lower. Replies that test a classmate's scenario under a different framework earn more participation credit than agreement. Use the legal terms, privity, scienter, due diligence and proportionate liability, exactly as the courts do.
ACC 645 Module 1 help: the mistakes that cost points
Students sometimes describe Section 11 and Rule 10b-5 as interchangeable, when they differ sharply in who can sue and what must be proved. Others treat any audit failure as fraud, when most claims against auditors allege negligence or recklessness. If your prompt focuses on common law liability to third parties instead, compare the privity, foreseen user and foreseeable user approaches through one example. State which plaintiff in your scenario has the easier case and why; that single judgment shows you understand the frameworks better than a summary of each. Then name the defense the auditor would raise against that plaintiff.
Get ACC 645 Module 1 written to your instructions
Send the ACC 645 Module 1 prompt. The post will explain the liability frameworks accurately, test them on a realistic lawsuit and back its view with studies, then close on a prompt for replies. Turnaround is two days, and the first is on us. The paper above is an original model document written by our desk, not a submitted student paper and not an official Southern New Hampshire University document.
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ACC 645 Module 1 questions, answered
Where can I find a free ACC 645 Module 1 Discussion sample?
This page includes the full ACC 645 Module 1 post on auditor liability under common law and the federal securities acts.
What must a plaintiff prove under Section 11 of the Securities Act of 1933?
That the registration statement contained a material misstatement or omission; plaintiffs need not prove reliance or the auditor's negligence, and the auditor must establish a defense such as due diligence.
What must a plaintiff prove under Rule 10b-5?
A material misstatement, scienter by the defendant, reliance, loss and causation; negligence alone is not enough.
What is proportionate liability?
Under the Private Securities Litigation Reform Act of 1995, defendants who did not knowingly commit fraud generally pay only their share of damages rather than the full amount.
Does litigation risk improve audit quality?
Research suggests it can: audit firms that are sued tend to show fewer misstatements at their other clients afterward, consistent with lawsuits prompting more careful audits.