04.01 Common Law Duties and Liabilities to Clients and Third Parties Flashcards
True or False: A tax practitioner is expected to be competent, maintain objectivity and integrity, and properly administer the law when serving their clients.
True.
What are the common law theories of practitioner liability?
Breach of contract; negligence; fraud.
Define breach of contract.
When a CPA does not fulfill the terms of an engagement contract (e.g. tax practitioner did not file a tax return for the client despite having a signed engagement letter by both parties)
Define negligence.
When a CPA fails to exercise due professional care (e.g. tax practitioner filed a return in a timely manner but carelessly miscalculated the taxes)
Define fraud.
When a CPA recklessly departs from the standard of due care expected of the profession when performing an engagement.
What four elements must a plaintiff prove to prevail in a breach of contract lawsuit?
COBD - a Contract must exist; one party fulfilled their Obligation; Breach of contract occurred; Damages were caused by the breach
What are examples of remedies for breach of contract?
Compensatory damages; consequential damages; liquidated damages; nominal damages; specific performance.
What are defenses for breach of contract?
Common defenses for malpractice due to a breach of contract are: statute of limitation; justifiable breach; substantial performance; legal incapacity; statute of fraud; mutual mistake; lack of consideration; illegality; unconscionability; estoppel.
True or False: The professional standard most often utilized is due professional care.
True.
What is the most common lawsuit against a CPA?
Negligence, which is the absence of due care.
When a CPA is negligent, who is the CPA liable to?
The client (in privity), any intended third-party beneficiary, and (in most states) any third party known or foreseen by the CPA.
What are examples of negligent breach?
Accountant carelessly neglects to file tax return on time; carelessly fails to file documentation needed to support a tax position; carelessly researches a tax issue and therefore erroneously advices the client to take a position that results in a substantial penalty; carelessly fails to consider tax return options that would save the client a substantial amount of tax liability.
To win a professional negligence malpractice case, what four elements must a plaintiff prove by a preponderance of the evidence?
OBID - Obligation of duty of care owed by the accountant to the client (plaintiff); Breach of the standard of care by accountant; Injury caused by the breach (proximate cause); Damages were caused/harm was suffered (i.e. financial loss).
True or False: The privity requirement is often the biggest obstacle in a negligence suit.
True.
Define a foreseen party?
A foreseen party is a third party or a member of a limited class that the accountant knew would be relying on their representations.
What is a tort?
A tort is a wrongful or injurious act, other than breach of contract, that subjects the person who committed the act to civil liability.
What are defenses for negligence?
Statute of limitation passes; Followed tax law (show due professional care); Lack of privity; Comparative negligence.
Define fraud.
The intent to deceive.
What are the two basic forms of fraud?
Actual fraud - making false statements with knowledge of their falsity (scienter)
Constructive fraud (gross negligence) - making false statements with a reckless disregard for truth, not knowing if the statements are true or false.
What elements are required to be proven in a fraud claim?
FMKID - False representation; misrepresented fact was Material; accountant Knew or recklessly disregarded the falsity; accountant Intended to induce the plaintiff to rely on the misstatement or omission; Damages were proximately caused by the false statement.
What are examples of fraud?
Practitioner artificially reduces or omits income from a tax return; falsifies expenses and deductions to artificially lower the tax liability; promotes fraudulent tax shelter to help wealthy client avoid tax obligations; created fake tax credits that are nonexistent; operates a tax preparer business and asserts that they are a CPA though they have no license or accounting degree.
What are defenses for fraud?
Statute of limitations; not grossly negligent; not material; lack of intent.
Define burden of proof?
The burden of proof is the preponderance of the evidence standard, meaning that the plaintiff need only to establish that alleged facts are more likely true than not true (>50%).
Define clear and convincing evidence.
Evidence that is substantially more probable to be true than not and that gives rise to a firm belief as to its factuality in the mind of the trier of fact.
