04.01 Common Law Duties and Liabilities to Clients and Third Parties

Question 1

True or False: A tax practitioner is expected to be competent, maintain objectivity and integrity, and properly administer the law when serving their clients.

Answer 1

True.

Question 2

What are the common law theories of practitioner liability?

Answer 2

Breach of contract; negligence; fraud.

Question 3

Define breach of contract.

Answer 3

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)

Question 4

Define negligence.

Answer 4

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)

Question 5

Define fraud.

Answer 5

When a CPA recklessly departs from the standard of due care expected of the profession when performing an engagement.

Question 6

What four elements must a plaintiff prove to prevail in a breach of contract lawsuit?

Answer 6

COBD - a Contract must exist; one party fulfilled their Obligation; Breach of contract occurred; Damages were caused by the breach

Question 7

What are examples of remedies for breach of contract?

Answer 7

Compensatory damages; consequential damages; liquidated damages; nominal damages; specific performance.

Question 8

What are defenses for breach of contract?

Answer 8

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.

Question 9

True or False: The professional standard most often utilized is due professional care.

Answer 9

True.

Question 10

What is the most common lawsuit against a CPA?

Answer 10

Negligence, which is the absence of due care.

Question 11

When a CPA is negligent, who is the CPA liable to?

Answer 11

The client (in privity), any intended third-party beneficiary, and (in most states) any third party known or foreseen by the CPA.

Question 12

What are examples of negligent breach?

Answer 12

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.

Question 13

To win a professional negligence malpractice case, what four elements must a plaintiff prove by a preponderance of the evidence?

Answer 13

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).

Question 14

True or False: The privity requirement is often the biggest obstacle in a negligence suit.

Answer 14

True.

Question 15

Define a foreseen party?

Answer 15

A foreseen party is a third party or a member of a limited class that the accountant knew would be relying on their representations.

Question 16

What is a tort?

Answer 16

A tort is a wrongful or injurious act, other than breach of contract, that subjects the person who committed the act to civil liability.

Question 17

What are defenses for negligence?

Answer 17

Statute of limitation passes; Followed tax law (show due professional care); Lack of privity; Comparative negligence.

Question 18

Define fraud.

Answer 18

The intent to deceive.

Question 19

What are the two basic forms of fraud?

Answer 19

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.

Question 20

What elements are required to be proven in a fraud claim?

Answer 20

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.

Question 21

What are examples of fraud?

Answer 21

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.

Question 22

What are defenses for fraud?

Answer 22

Statute of limitations; not grossly negligent; not material; lack of intent.

Question 23

Define burden of proof?

Answer 23

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%).

Question 24

Define clear and convincing evidence.

Answer 24

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.