Ch 11 - Liability Of Accoutants And Other Professionals

Question 1

Accountant liability for negligence

Answer 1

Fail to exercise care of a competent, reasonable professional
At minimum, follow GAAP and GAAS

Question 2

Defenses for negligence

Answer 2

Deny failing to meet professional standards
Argue that failure isn’t cause of client’s loss
Contributory/comparative negligence of client

Question 3

Accountant liability for breach of contract

Answer 3

Engagement letter - explicit promise for contractural tasks, implicit promise for competent and professional work according to relevant standards

Question 4

Accountant liability for fraud

Answer 4

Accountant misrepresented a material fact
Accountant acted with intent to deceive
Client justifiably relied on misrepresentation
Client suffered an injury by relying on fraudulent information
Meet these 4 criteria = actual fraud

Question 5

Constructive fraud

Answer 5

Fraud without fraudulent intent (gross negligence)

Question 6

3 groupings of common law accountant liability to 3rd parties

Answer 6

Privity or near privity (ultrameres)
Foreseen users and classes of users (Restatement rule)
Reasonably foreseeable users

Question 7

Ultrameres rule

Answer 7

Accountant held liable for negligence only to those whose primary benefit the accounting statements were prepared for

Question 8

Restatement rule

Answer 8

An accountant is liable to known third party users of the accountant’s work product and those in the limited class whose reliance on the work the accountant specifically foresaw

Question 9

Reasonably foreseeable users test

Answer 9

Accountant is liable to any 3rd party who was or should have been foreseen as a possible user of the accountant’s work product and who did in fact use and rely on that work product for a proper business purpose

Question 10

Working papers

Answer 10

Various documents used and developed during an audit (notes, calculations, copies, memos, etc)
After audit acct is legal owner, information within belongs to client

Question 11

Accountant client privilege

Answer 11

Right of an accountant to refuse to reveal any information given to him during the course of providing accounting services to a client
Not recognized by common/federal law, but some states adopt a form of it (weaker than attorney-client privilege)

Question 12

Securities act of 1933

Answer 12

Accountants civilly liable for misstatements and omissions of material facts made in registration statements the SEC requires
Plaintiff need not prove reliance on statement to establish privity

Question 13

Defenses against securities act of 1933

Answer 13

Prove due diligence by showing no fraud or negligence committed (no misstatements, omissions exist)
Contest liability on grounds of materiality
No causal connection to purchaser’s loss
Purchaser knew of misstatements/omissions

Question 14

Securities exchange act of 1934

Answer 14

Accountants are liable to fraudulent statements made to the SEC in documents filed with it
Requires higher burden of proof: plaintiff must prove the false/misleading statements affected the price of the security, and reliance was placed upon the statement without knowledge of its inaccuracy

Question 15

Defense against securities exchange act of 1934

Answer 15

Good faith requirement fulfilled

Accountant proves plaintiff knew statements were false

Question 16

Prove absence of good faith on part of accountant (34 act)

Answer 16

Scienter (accountant knowingly committed an illegal act)
Reckless conduct
Gross negligence

Question 17

Recovery under 10b of securities exchange act of 1934, buyer or seller of security must prove these 6 things

Answer 17

Status as purchaser or seller (privity not required)
Scienter
Fraudulent act or deception
Reliance on fraudulent statement
Statement in regard to a material fact
Reliance on the statement caused plaintiff’s loss

Question 18

3 Primary types of liability assessed to accountants under common law

Answer 18

Negligence
Breach of contract
Fraud