Shared Flashcard Set


Regulation 7

Additional Accounting Flashcards




One person or entity (the principal) appoints another person or entity (the agent) to work/act on his behalf. 
Requisites for Creation of an Agency Relationship

Principal must have CAPACITY (not a minor, not incompetent) and CONSENT (agreement to act as principal and agent) 


Writing not required unless its LAND (buy or sell) or impossible to perform in ONE YEAR. 


AGENT does NOT need to have Capacity- Minor are allowed to be agents. 


No consideration is required. 


Power of Attorney

Written Authorization of Agency. 


Agent has the power to act on behalf of the principal. 


Generally only the principal is required to SIGN the power of attorney. 


Agent's authority is usually limited to a specific transaction. 

Duties of Agent to Principal

Fiduciary Duty


1. Duty of Loyalty (no kickbacks, no self dealing, avoid conflicts of interest, no disclosure of confidential info) 

2. Duty of Obedience- Reasonable directions, Don't exceed authority. 

3. Duty of Reasonable Care- Liable if negligent to both principal and third party 

4. Duty to Account- account to the principal all transactions. Can not comingle principal & agent's property. 

5. Subagent- subagent owes a duty of care to both agent & principal. 

Principal's Remedies

If agent breaches duties... 


1. Tort damages- civil wrong, negligent or fraud, negligently or intentionally breached a duty owed to principal. 

2. Contract damages- if Agent was compensated, the principal can collect contract damages for breach of contract 

3. Recovery of secret profits- If agent obtained a secret profit, the principal can recover those profits by imposing a "constructive trust" 

4. Withhold compensation- can refuse to pay agent. 

Duties of Principal to Agent

1. Compensation- unless agreed to act gratuitously, principal has implied duty to compensate the agent.


2. Reimbursement- implied duty to reimburse (indemnify) the agent for all expenses incurred in carrying out the agency 


Remedies of Agent

If principal breaches duties, agent can bring action against. 


However, the agent has a duty to mitigate damages. 

Power to Terminate Relationships

Either party usually has the POWER to terminate the relationship at any time. Don't necessarily have the RIGHT to terminate. 

Exception: If the agency is coupled with an interest. IE when the agent has an interest in the subject matter... like agent is a creditor of principal. Principal has no right or power. 

Agency Power

(not necessarily the right)

Agency power can arise through: 


1) Actual Authority

2) Apparent authority or estoppel

3) Ratification 

Actual Authority

"real authority" 


The authoirty the agent reasonably believes he possesses because of the principals' communications to the agent. 


Both power and the right to bind the principal. 


Can be express or implied. 

Express Actual Authority
Actual authority includes all powers expressly grants within the agency agreement. Either oral or written instructions. 
Implied Actual Authority

Authority that the agent could REASONABLY believe is implied. 


Reasonably necessary to carry out the agency. 

Repeatedly allowed. 


IE a business manager usually has the authority to hire, buy merchandise, etc. 

Termination of Actual Authority

1. Act of the Parties - agent quits (renunciation) or gets fired (revocation). Could be a breach of contract-- damages awarded. 

EXCEPTION: Agency coupled with intrestes- only the agent can terminate relationship. 


2. Accomplishment of Objective or Expiration of Stated Period- fulfill the purpose or time lapses. 


3. Automatically when 

a. DEATH of either party

b. INCAPACITY of the principal

c. DISCHARGE in bankruptcy of principal

d. FAILUTRE to acquire necessary LICENSE.

e. DESTRUCTION of subject matter. 

f. Subsquent ILLEGALITY 

Apparent Authority 

Agent has the power but not the right. Causes third parties to reasonably believe that the agent had the authority. 


Given by Principal's Conduct-- giving title or position, the agent can not self claim. 


Must give notice of the limitations on the agent's authority. 

General vs. Special Agent

General Agent- series of transactions, continuity of service. Broader apparent authority


Special Agent-- one or more transactions, no continuity of service. 


Termination of Apparent Authority


 Actual Notice vs Constructive Notice


Agent will continue to have apparent authority unless the principal notifies third parties who may have known of the agency. 


Actual- terminates apparent authority to OLD customers. 


Constructive- terminates apparent authority to NEW customers. 


NO notice is needed if there is:

DEATH of either party

INCAPACITY of principal

BANKRUPTCY discharge of principal. 


Allows a princiapal to choose to become bound by a previously unauthorized act of the agent. 


1. Agent must have indicated they were ACTING ON THE BEHALF of the principal. 

2. All material Facts must be disclosed. 

3. MUST ratify the ENTIRE transactions- partial not allowed. 

4. Can be Expressely or impliedly ratified. 

5. Exceptions to Ratification: illegality, 3rd party withdraws prior to ratification, material change of circumstance

5. Principal must be Disclosed. 

Contracutal Liability
Principal is liable if they are disclosed or if they are undisclosed and the agent had actual authority.
Agent's Liability to the 3rd party 

If Principal is DISCLOSED- Agent is not liable if they were authorized. If they have no such authority, the 3rd party can hold agent liable for damages due to breach of contract. 


If principal is PARTIALLY DISCLOSED or UNDISCLOSED- the agent is liable. Third party can choose to hold either principal or agent liable-- not both. 

IF undisclosed there can be no apparent authority. 

Third party liability

Generally only principal can hold the third party liable. 


EXCEPTION: Principal's idenity was fraudently concealed or the performance to the principal would increase the burden on the third party. 

Tort Liability

In general, the princiapl is not liable for torts committed by his agent, only agent is liable. 


Except for employers, who under RESPONDEAT SUPERIOR, the employer is responsible for employee's rots within scope of employment. Doesn't relieve the agent of liability. 

- Only when employer-employee relationship- not independent contractors

-within georgraphic area & time of work. 

-generally only negligence torts, not intentional or criminal torts. 

-agreements between employee & employer can't stop 3rd parties from going after employer. 

Chapter 7 Bankruptcy: Liquidation

For an individual, partnership, corporation


Trustee appointed, collects assets, liquidates them, and uses proceeds to pay off creditors. 


Individuals's debts are discharged (with some exceptions).

If a seperate/artifical entity, it is dissolved and debts are wiped out.

Chapter 13: Adjustment of Debts of Individuals with Regular Income

The debrot repays all or a portion of his debts over a 3 year period (max 5 year period). 


No liquidation, but trustee oversees. 


At the conclusion of the ch. 13, the remaining debts of debtor are discharged. 

Chapter 11: Reorganization

Usually no trustee. 


Debtor remains in possession of assets and a plan of reorganization is adopted. 


Creditors are paid to the extent possible and business continues. 


What dismisses a Chapter 7 case...


The Means Test


For an individual consumer debtor, the claim may be dismissed if determined the debtor is abusing the relief.


1. Step 1: Calculating the Debtor's Income. Take AVERAGE of previous 6 months, X 12- and compare to state median income. 

IF = or less than state median income = OK with Ch. 7

If GREATER than state median income move on to step 2. 


2. Step 2: Find current monthly income (avg monthly income- allowed expenses). X 60. 

IF less than $7,025= OK with Ch. 7

IF greater than $11,723= NO, ABUSE. May file for Ch 13

IF between $7,025-$11,025- OK only if net MI X 60  < 25% of unsecured claims. 

Allowable Deductions against Monthly Income when Calculating the Means Test 

1. Living Expenses

2. Health & Disability Insurance, Health Savings Acct

3. Care of elderly, disabled, chronically ill

4. Expenses to keep debtor of family safe from family violence *WHAT?* 

5. Administration expenses to complete the Ch 13 - up to 10% of projected payment plan 

6. Actual expenses for Dependents to attend Elementary or High School (up to $1775 for each dependent child under 18)


Who may be a debtor in Chapter 7 Liquidations

Individuals, Partnerships, Corporations... 





Insurance companies

Banks & Savings Institutions

Small business investment Companies. 


"Can't liquidate something that has ribs". 


Who may be a debtor under Chapter 11 Reorganization

Individuals, Partnerships, Corporations... 





Insurance companies

Banks & Savings Institutions

Small business investment Companies. 


"You're too old to use BIBS even if reorganization gets messy". 


Chapter 7 & 11 


Automatic Stays


When a bankruptcy petition is filed, an automatic stay (stop) becomes effective against almost all collection efforts. 


Does NOT apply to criminal prosecutions, paternity suits, or cases for spousal or child support obligations. 

Duties of Debtor under CH. 7 & CH. 11

Once a petition is filed, must also file: 


1. List of creditors with addresses

2. Schedule of Assets and Liabilities at FMV

3. Schedule of current income & expenditures

4. Statement of debtor's financial affairs

5. Copies of pay stubs recieved within 60 days prior to filing.

6. Itemized statement of monthly net income

7. Dislosure of any reasonably anticipated increase in income or expenditures for proceeding 12 mos. 

8. Copies of fed tax returns from last year. Must file taxes before you can proceed.

9. Record of interest in an educational IRA or qualified state tuition program 

10. Individual- Certificate proving credit counseling. 

11. Individual- Details of plans of property- whether to retain or surrender it.


*Must file within 45 days after filing petition or the case is automatically dismissed. 

Voluntary Cases of Ch. 7 & Ch. 11

Debtor files for order of relief- have debts of any amount not capable of paying upon due. 


Debtor doesn't have to be insolvent, but must pass income tests. 


Constitutes an automatic order for relief. 

Involuntary Cases of Ch. 7 & 11

Unsecured creidotrs may petition a debtor into involuntary bankruptcy proceedings.


Must prove debtor is "IN DEFAULT"


Exempt from involuntary- farmers & charitable organization


Must be owed at least $14,425 in unsecured, undisputed debt. 


If under 12 creditors, 1 or more people who are owed at least $14,425


12 or more creditors, at least 3 creditors who are owed $14,425 together may join together and file. 


Not an automatic order for relief. There is a GAP- between filing and order of relief "Involuntary Case Gap". Creditors who became creditors during the gap are given high priority. 


If found to be frivilous, the debtor may be awarded compensatory damages, court & legal fees, and punitive damages if bad faith can be shown. 

Section 341 Meeting- Creditor Meeting

Within 20-40 days of the order for relief, meeting of creditors is held. 


ALL interested parties must be given notice of meeting - creditors, bankruptcy trustee, and debtor. 


Debtor must attend. 

Bankruptcy Estate

Property included at "time of filing"- all debtor's real and personal property. 


Income generated from estate property (interest, etc). 


Property recieved from divorce, inheritance, or insurance withing 180 days of filing. 


Property excluded from estate during bankruptcy

1. Post petition earnings

2. Contributions to educational IRAs, qualified state tuition programs

3. Contributions to qualified employee benefits

4. "Necessary to live"

a. Homestead (up to $21,625)

b. Motor Vehicle (up to $3,450)

c. Household goods, crops, animals (up to $11,525)

d. tools of trade

e. life insurance contracts

f. health adis

g. government benefits

h. alimony, support, or maintenance


Exemptions don't apply if PMSI, tax lien, mortgage

Trustee as a Creditor

Trustee is hypothetical lien creditor as of filing date.


Trustee has priority over all creditors except creditors with prior perfected security interests or prior statutory/judical liens.


PMSI in noninventory collateral may also have priority. Within 30 days. 

Power over Fraudulent Transfer & Preferential Payments

Trustee has power to set aside Any transfer with intent to hinder, delay, defraud creditors, or any transfer where the debtor received less than equivalent value while debtor was insolvent made within 2 years of filing date.


Can disaffirm preferential payments usually made within 90 days (insider) or up to 1 year.

Made while debtor was insolvent. 

Creditor recieved more than they would have under bankruptcy code. 


Transfers that cannot be taken back by trustees during bankruptcy

1. Transfers in ordinary course of business

2. PMSI perfected within 30 days

3. Consumer debts under $600 

4. Domestic support obligations. 

Claims against the Estate

Unsecured Creditors must file a proof of a claim and shareholders must file a proof of interest with bankruptcy court. Unless someone objects, it will be automatically allowed. 


Perfected Security Interests survive bankruptcy even if creditor doesn't file. 


Chapter 7 Bankruptcy


Objections to Discharge


1. Debtor is not an individual or entity

2. Fraudulent Transfers/Concealment of Property

3. Unjustifably Failed to Keep Books and Records

4. Can not prior discharge within an 8 year period. 

5. Fraudently action in court, false oaths, false claims, bribes, withholding documents

6. Failure to explain loss of assets

7. Refusal to obey orders or answer questions

8. Improper conduct in an insider's case

9. Written waiver of discharge executed by debtor

10. Failure to complete personal fin. mgmt class


Debts exempt from discharge under CH 7 & 11




Willful and Malicious Injury (Driving drunk included)

Alimony, Maintenance, Support Settlements (child support)

Fines and Penalties (traffic fines, etc)

Fraud- liabilities committed under fraud

Taxes due within 3 years of filing 

Embezzlement or Larcery, Fraud by a Fiduciary

Educational Loans unless would impose undue hardship

Debts undisclosed in bankruptcy filing


Distribution of Debtor's Estate- Payment & Priorities




If there's not enough money to pay all creditors at a particular level, the creditors share pro rata. 


1. Secured Claims

2a. Support Claims (alimony, child support)

2b. Administrative Expenses (fees)

2c. Gap Claims- Ordinary course of business claims that occured in the gap period between filing & order of relief

2d. Wage Claims - wages earned with 180 days of filing, up to $11,725 per employee

2e. Employee Benefits -health insurance/pension plans within 180 days. may not exceed the $11,725 between wages & benefits

2f. Grain farmers & fisherman 

2g. Consumer Deposits - for goods paid for but not delivered up to $2,600

2h. Tax Claims

2i. Personal Injury claims arising from driving while intoxicated 

3. Unsecured Claims 


Chapter 11 Reorganizations 




Creditors' Committee: Unsecured creditors, usually consisting of 7 largest unsecured claims against debtor (can elect to not have a committee appointed if under 2.3 mil in debts and not real estate-small business election)


If debtor is a corporation, stockholders (security holder) committee may be appointed consiting of 7 largest holders of equity securities. 


Committees can consult with debtor, investigate fiances, participate in preparing the reorganization plan

Chapter 11 Reorganization Plan

Debtor has exclusive right to file a plan during the first 120 days after the order of relief has been filed. 



1. A trustee has been appointed

2. The debtor hasnt filed within 120 days

3. A plan has been filed but not approved within 180 day of order of relief. 


Contents of a Ch. 11 Reorganization Plan & Approval

1. Classification of all claims (secured, 1st priority, 2nd priority, etc)

2. Describe treatment for each class

3. Treat each claimant within the same class the same

4. Establish ways to implement the plan 


Must be approved by 2/3s of Creditors/stockholders

Confirmation of Ch. 11 Reorganization Plan by Courts

If accepted by all impaired classes and provides payment for all priorities and is feasible. 


Cram Down- Can be confirmed by the court even if not accepted by ALL imparied classes if :

At least one impaired class has accepte

Plan is fair and equitable 


Once confirmed, the plan is BINDING on all parties regardless if they voted yes or no. 


Confirmation follows the WAFTED exceptions and once confired, the automatic stay is dissolved. 

The Securities Act of 1933

For IPOs. 


Assures investors have sufficient information on which to make informed investment decision


SEC acts as a watchdog to insure completeness, not necessarily accuracy or assurance




The Registration Statement as reuqired by the Securities Act of 1933

Most securities cannot be sold unless they are first registered with the SEC. 


Part 1: Prospectus- written offer to sell securities, summarizes info found in part 2, and each investor must receive a prospectus before or at time of sale. 


Part 2: Audited Balance Sheet (no more than 90 days priort) & P&L Statement (for proceeding 5 years) 


Other material facts including who, what, purposes, anything that affects value. 


Effective 20 days after filing unless SEC files refusal or stop order. 

Shelf Registrations

One registration statement for all securities offering that will occur in the future. 


ONly permitted if issuer has continously filed under the 1934 act for one year and has continually updated the info. 

Timetable for Sales Activity under Securities Act of 1933

30 days before Registration (Prefiling)- No sales activity, may negogiate with underwriter


20 day waiting period between Registration & Effectivness - Sales are generally prohibited by may start adveristing. Red herring prosepctus (red ink stating NOT yet final). 


After Effective date (20 days after filing)- securities may be sold as long as investors recieve prospectus prior to or at the time of sale. 


Exemptions for Registration under the 1933 Securities Act


Types of Securities


Following securities are exempt from registration


Banks, savings, and loands - ie CDs

Regulated common carriers - ie railroads

Insurance policies

Not for profit organization securities

Government issued

Short term commerical paper- ie notes, bonds for 9 months or less




Exemptions for Registration under the 1933 Securities Act


Types of Transactions 


1. Resale by an investor

2. Exchanges with Existing holders (stock splits, stock dividiends)

3. Exchanges as a result of reorganization

4. Intrastate sales- sold onl to resident of issuers state

5. Partial Reg A exemption- simplified form of registration with unaudited FS, offering statement, Reg A sales may not exceed $5 mil in 12 months

6. Private Offering Exemption- Reg D.


Private Offering Exemption


Regulaiton D


For PRIVATE OFFERINGS: No advertising

Immediate Resale to Public Prohibited (must hold for at least 2 years) 
Must inform the SEC within 15 days of sale. 


504 exemption- may not exceed $1 million in 12 mos, no limitations on purchases or requirements for disclosure


505 exemption- may not exceed $5 mil in 12 mos, may be sold to any amount of accredited investors & 35 or less unaccredited investors. If there are unaccredited investors, ALL must be given audited financials.


506 exemption- Unlimited dollar amount, any number of accredited investors and 35 or less unaccredited by sophiscated investors (sufficient knowlede & experience), must provide financials if unaccredited investors. 



Liability Under the 1933 Act

Section 11: Civil liability for misstatements (intentional or not)


Section 12 & 17: Anti fraud even applies to unregistered/exempt securities. 

Section 11 Liability under 1933 Securities Act

Makes anyone who signs the registration statement liable for all damages casued by any misstatement of material fact in registration statement. 


Must prove: 


Loss was suffered

Acquisition of the stock

Material Misstatement, misrepresentation, or omission


No need to prove intent to decieve or negligence or reliance


Possible Defenses: 

If can prove "Due Deligence"- ie that they had reasonable grounds to believe facts in registration statement were true & complete. 


or Misstatement did not cause the plantiff's damages

or the plantiff knew when purchased the security or misstatement is not material


Damages are the only remedy

Securities Exchange Act of 1934

The exchanges (sales, purchases) of securities once they are issued, registration & reporting provisions, and anti-fraud provisions


Registration with the SEC for companies who must register their securities-- shares traded on national exchange or those that have at least 500 shareholders or more than $10 mil in assets. 


National stock exchanges, brokers, dealers must also registration. 


Exempt are Investment companies, Saving and Loans, charitable organizations



1934 Act Reporting Requirements

All companies required to register under 1933 and 1934 must make reports. 


10K- filed annually within 60 days of end of fiscal year. Contains material facts about mgmt & facts impacting value as well as audited financial statements. 


10Q- quarterly reported within 40 days, contains reviews of interim financial information. 


8k- within 4 days after a major change in the company. 


5% of more owners must also register with the SEC. 

Tender Offers
An offer to all shareholders to purchase stock for a specific price for a specific period of time. 
Insider filing Reports

Officers, directors, more than 10% stockholders, accountants, or attorneys of a company registered under the 1934 act. 


Must file a report with SEC disclosing their holdings and make monthly updates. 


Additional Reports Required Under 1934


5% TIP


Owners of 5% of more


Tender Offers


Proxy Solicitations


Anti-Fraud Provisions


Rule 10b-5


Applies to all even if not registered. 


Prohibits fraud in connection with the purchase or sale of any security. 

Violation can result in civil damages, an SEC injuction, or criminal fines & penalties. 


To recover damages, plaintiff must prove Fraud -- MAIDS. 

Misrepresentation of material fact (opinions don't count)

Actual and justifiable (reasonable) reliance by the plaintiff on the misrepresentation 

Intent to induce plaintiff's reliance on misrepresentation 

Damages (compensatory and punitive for fraud)

Scienter (knowing statement was false or with reckless disregard for the truth) 


Interstate commerce--therefore fed laws appply. 


Insider trading is also illegal under 10b-5. 

Differences between 10b-5 and Section 11 of 1933

Section 11 requires no proof of scienter, reliance, or negligence. 


Under 10b-5, must prove scientor and reliance. MAIDS. 


CPA Legal Liability


Breach of Contract


If CPA doesn't fulfill the terms of the engagement, the client can hold CPA liable for breach. Usually PRIVITY exists, so only a party under the contract can sue for damages. 


Named third party may recover compensatory damages

If material, CPA cannot recover payment 


CPA defense is proof of hinderance. 


CPA Legal Liability


Commission of Torts


1. Negligence


Wrongful Act


1. Negligence - failure to work about IC weaknesses, failure to properly review/supervise. (duty of care owed, breached, caused injury, recieve damages)

-liable to clients, any person or classs of peope who may be relying on the CPAs work. not necessarily named, but reasonable. 


Some states follow ULtramares-limits liability to named 3rd party beneficiaries. 


Must prove DUE DILIGENCE- usually GAAP or GAAS adherence





CPA Legal Liability


Commission of Torts


2. Gross Negligence 



Fraud or Constructive Fraud


Must prove MAIDS

Misrepresentation of material fact

Actual & justifiable reliance

Intent to decieve


Scienter- Intent to decieve 


Reckless actions


Liable to anyone who can prove the above elements. Not necessarily privity.


Best defense fraud- Acted in Good faith -- lack of scienter


CPA Legal Liability


Commission of Torts


3. CPA Statutory Liability


Securities Laws. 


Section 11 of 1933-- LAM for IPOs 

10b-5 -- Fraud proved by MAIDS 


Privileges between CPA and Client

Generally no accountant-client privilege


a CPA can be forced to disclose client information, including workpapers if relevant or subpoenaed by fed court case. 

Workpapers Disclosure

Disclosure of workpapers generally prohibited


Workpapers belong to accountant not the client but are prohibited from showing them to anyone without the client's permission except:


1.  subpoenaed/court cases

2. shown to a prospective purchaser - not turned over. 

3. state CPA society

4. Defend a lawsuit brought by a client

5. investigation by AICPA/state trial board

6. GAAP/GAAS requires disclosure 

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