Accountant's Liability Flashcards Preview

Legal Business II > Accountant's Liability > Flashcards

Flashcards in Accountant's Liability Deck (48):

What are the 2 primary functions of accountants?

1 auditing financial statements

2 rendering opinions about those audits


What generates the majority of litigation against accountants?



What 2 uniform standards of professional conduct must CPAs comply with.

1 generally accepted accounting principles GAAP

2 generally accepted auditing standards GAAS



Standards for preparation and presentation of financial statements


Generally Accepted Auditing Standards GAAS

Specify methods and procedures that must be used to conduct


Audit define

Who must it be performed by?

Verification of company's books and records

Must be performed by an independent CPA


An accountant's failure to follow GAAS when conducting audits



Unqualified opinion

Represents an auditor's finding that the company's financial
Statements fairly represent company's financial position

Most favorable opinion an auditor can give


Qualified opinion

States financial statements are fairly represented except for
Departure from GAAP, a change in accounting principles or
Material uncertainty

The exception is noted in auditor's opinion


Adverse opinion

Financial statements don't fairly represent company's financial

Usually issued when auditor determines that company materially
Misstated certain items in its financial statements


Disclaimer of opinion

Expresses auditor's inability to draw conclusion of accuracy
Of financial records


The issuance of other than an unqualified opinion

Can have substantial adverse effects on company audited


What business form are most accounting firms organized as?

Limited liability partnerships


Limited liability partners

All partners are limited partners who lose only their capital
contribution in the LLP if the LLP fails

Limited partners aren't personally liable for debts and obligations
Of the LLP unless negligent or intentional conduct causes injury


What 3 legal theories hold accountants liable to their clients?

1 breach of contract

2 fraud

3 negligence


Terms of engagement

Specified when accountant and client enter into a contract


Breach of contract

Accountant who fails to perform contract


2 Damages for breach of contract

1Expenses client incurs in securing another accountant to
Perform needed services

2 Fines/penalties for clients missed deadlines and lost opportunities


Actual fraud

What kind of damages are awarded for actual fraud?

Intentional misrepresentation or omission of material fact that
Is relied on by client and causes client damage

Punitive damages are awarded for actual fraud


Constructive fraud AKA Gross negligence

Accountant acts with reckless disregard for truth or consequence
Of his or her actions


Negligence AKA Accountant Malpractice

When accountants fail to use reasonable care, knowledge, skill
And judgement when providing auditing and other accounting
Services, preparing unaudited financial statements


If an audit turns up a suspicious transaction or entry the accountant...

Is under duty to investigate it and inform client of results of


Violations of GAAPs and GAASs

Are prima facie evidence of negligence


Who are the third parties in cases of liability of accountants to third parties?

Plaintiffs including shareholders, bond holders, creditors, banks
Who relied on info supplied by auditor


What are the 3 major rules of liability that a state may adopt in determining whether an accountant is liable in negligence to 3rd parties?

1 ultramares doctrine

2 section 552 of the Restatement (Second) of Torts

3 foreseeability standard


Holding in Ultramares Corporation v. Touche

Accountant can't be held liable for negligence unless plaintiff
Private contract or had private relationship with accountant


Ultramares Doctrine

In order for plaintiff to have standing, they must have private
Contract/ relationship with accountant


Section 522 of the Restatement (second) of Torts

Account is liable for negligence to any member of limited class of
Intended users for whose benefit the accountant has been employed

To prepare client's financial statements or to whom accountant
Knows client will supply copies of financial statements


Under Section 522 of the Restatement (second) of Torts, adopted by many states, what does the accountant not have to know to be held liable?

The specific name of the third party


Foreseeability standard, for holding accountants liable to third parties for negligence (adopted in a few states)

Accountant is liable go any foreseeable user of the client's
Financial statements

The accountant's liability does not depend on his knowledge
Of identity of user or intended class of users


Third parties and Privity of contract with accountants

Third parties can't sue accounts for breach of contract because
Third parties are merely incidental beneficiaries

They don't acquire any rights under the accountant client contract
As they aren't in privity of contract


Section 10A to Securities and exchange Act of 1934

Imposes duties of auditor to detect and report illegal acts
committed by their clients


Section 11(a) of Securities Act of 1933, Imposes civil liability on accountants and others for... 2 things

1 making misstatements or omissions of material facts in
registration statement

2 failing to find such misstatements or ommissions


Due diligence defense to liability

Accountant avoids liability if he, after reasonable investigation
And reasonable grounds at time of registration to believe
Statements were true

And there was no omission of material fact


Section 10(b) of Securities Exchange Act of 1934

Prohibits any manipulative or deceptive practice in connection
With purchase or sale of any security


Rule 10b-5

Makes it unlawful for any person by means of instrumentality
Or interstate commerce to employ any device or artifice to defraud

To make misstatements of material fact, any act of fraud in
Connection with security


Who can sue under Section 10(b) and Rule 10b-5

Only buyers and sellers of securities

Privity of contract is irrelevant


Section 18(a) of the Securities Exchange Act of 1934

Imposes civil liability on any person who makes false or misleading statements of material fact in any application, report or document
Filed with SEC


2 ways an accountant or another defendant can defeat the imposition of liability under Section 18(a)

1 defendant can show they acted in good faith

2 can show plaintiff had knowledge of false or misleading
statement when securities were purchased or sold


Joint and several liability

Where one party (defendant) of several at-fault parties could
Be made to pay all of a judgement


Proportionate liability

Limits defendants liability to its proportionate degree of fault


Private Securities Litigation Reform Act of 1995, what to things did it do?

1 more difficult for plaintiffs to bring class action securities lawsuits

2 replaced joint and several liability with proportionate liability,
Unless defendant acted knowingly


Section 24 of Securities Act of 1933, Tax Reform Act of 1976, RICO, Section 32(a) of the Securities Exchange Act of 1934: penalties

Result in criminal liabilities and fines

Both involve falsifying info to the SEC


State enacted: Uniform Securities Act section 101

Criminal offense for accountants and others to willfully falsify
financial statements and other reports


Sarbanes-Oxely Act of 2002

Imposed new rules to improve financial reporting, eliminate
Conflicts of interest and provide government oversight of
Accounting and audit services


Accountant-client privilege

Enacted statute in about 20 states

Accountant can't be called as a witness against a client in a
Court action


The accountant client privilege does not exist under both...

Common law

And according to the Supreme Court it doesn't exist under
Federal law


Work product immunity

Accountant's work papers can't be discovered in court case
against accountant's client

Applies in some state statutes