Professional and Legal Responsibilities - Module 23

Question 1

Ultramares Rule (minority rule)

Answer 1

accountants are liable for negligence to 3rd parties

1) if they were in privity with them    2) they knew the specific name of the 3rd party that would rely on their work

Question 2

Actual Fraud

Answer 2

M material misrepresentation of fact
S scienter

R reasonable reliance
I intent to rely
D damages

Question 3

Constructive Fraud or Gross Negligence

Answer 3

M material misrepresentation of fact
R reckless disregard for the truth

R reasonable reliance
I intent to rely
D damages

Question 4

Ordinary Negligence

Answer 4

Duty of Care
Breach - failed to act as reasonably prudent accountant - usually means didn’t follow GAAS or GAAP unless following makes report misleading
Damages
Causality - the damages were caused by accountant’s breach

Question 5

Third Party Beneficiary Rule (Intended User)

Answer 5

Accountants reliable for negligence if they had reason to know third party would rely on their work

Question 6

Majority View

Answer 6

Most states have expanded Ultramares to make accountants liable for negligence to forseen users and any forseen class of users

Question 7

Third Parties

Answer 7

Can always sue for fraud

Question 8

Liabilities under securities act of 1933

Answer 8

‘33 act requires a registration statement (prospectus) filed with the SEC containing audited financial statements for public sales of securities through interstate commerce

Question 9

Civil Liability - monetary damages for suits under section 11 of ‘33 must show

Answer 9

a. acquired the stock
b. suffered a loss
c. material misrepresentation
d. No scienter, reckless disregard for the truth or reliance need to be proven
e. Accountant liable unless he can prove not his fault (due diligence defense)
f. Plaintiff must sue within 1 year of discovery and within 3 years that prospectus was filed with SEC

Question 10

Liabilities under securities act of 1934

Answer 10

‘34 generally covers stock sold on national stock exchanges in interstate commerce and requires reports and financial statement prepared by public accountants

Question 11

Monetary damages for suits under section 10-b and 10-b- 5 must show

Answer 11

a. purchaser of stock
b. loss
c. material misrep
d. Scienter or reckless disregard for the truth
e. reliance
f. no due diligence defense

Question 12

Tort Law (civil wrongs)

Answer 12

a. Ordinary Negligence
b. Actual Fraud
c. Constructive Fraud

Question 13

Preparer

Answer 13

an individual who prepares federal tax return for compensation must sign the tax return

Question 14

Tax return position

Answer 14

Should only take position that would comply with tax law

Question 15

Use of estimates

Answer 15

When data is missing, estimates of missing data may be made by client

If estimates are reasonable and there is no other way to obtain data CPA may use estimates