4.1 COMMON LAW DUTIES AND LIABILITIES TO CLIENTS AND THIRD PARTIES

Question 1

WHAT ARE THE 3 MOST COMMON LIABILITIES ACCOUNTANTS FACE FROM VIOLATIONS OF COMMON LAW?

TRUNK

Answer 1

TAX PRACTITIONERS ARE LEGALLY GOVERNED BY COMMON LAW PRINCIPLES.

IN COMMON LAW ACCOUNTANTS FACE LIABILITIES AS A RESULT OF THREE COMMON LAW PRINCIPLES

A) CONTRACT - NOT FULFILLING THE TERMS OF THE ENGAGEMENTS FACES LIABILITY FOR BREACH OF CONTRACT. THE LIABILITY IS TO THE CLIENT AND ANY INTENDED USER

B) ORDINARY NEGLIGENCE - FAILURE TO EXERCISE DUE PROFESSIONAL CARE - THE LIABILITY IS THE CLIENT, AND ANY FORESEEN USER.

C) GROSS NEGLIGENCE - RECKLESS DEPARTURE FROM THE STANDARDS OF DUE CARE. THE LIABILITY IS TO THE CLIENT AND ANYONE INJURED.

Question 2

TO PREVAIL IN A BREACH OF CONTRACT WHAT MUST THE PLAINTIFF PROVE? “COBD”

Answer 2

A) CONTRACT MUST EXIST
B) ONE PARTY FULFILLED THEIR OBLIGATION
C) BREACH
D) DAMAGES WERE CAUSED

Question 3

WHAT IS THE MOST COMMON TYPE OF PENALTY (DAMAGES) AN ACCOUNTANT WILL BE REQUIRED TO PAY FOR BREACH OF CONTRACT?

Answer 3

-COMPENSATORY “MONEY” DAMAGES - MEANT TO REIMBURSE AN INJURED PARTY FOR THE ECONOMIC LOSS SUFFERED BECAUSE OF AN ACCOUNTANT BREACH OF CONTRACT.

-CONSEQUENTIAL DAMAGES - INDIRECT AND ANTICIPATED LOSSES

-LIQUIDATED DAMAGES - PREDETERMINED LOSS AGREED BY BOTH PARTIES

-NOMINAL DAMAGES - TRIVIAL SUM

-SPECIFIC PERFORMANCE - COURT ORDERING SPECIFIC TRANSFER OF THE CONTRACT’S UNIQUE SUBJECT MATTER.

-PUNITIVE DAMAGES - ENRICH THE INJURED PARTY BEYOND THE ECONOMIC POSITION OF THE ORIGINAL TRANSACTION.

-RESCISSION THE ACT OF RESCINDING(VOID) A CONTRACT AND RESTORING PARTIES TO THEIR POSITIONS PRIOR TO THE CONTRACT

Question 4

WHAT ARE THE NECESSARY ELEMENTS A CLIENT MUST PROVE IN ORDER TO HOLD AN ACCOUNTANT LIABLE FOR COMMON LAW “ORDINARY” NEGLIGENCE? (CAMPS)

Answer 4

1) CASUAL RELATIONSHIP: PLAINTIFF SUFFERED HARM BECAUSE OF THE CPA
2) ABSENCE OF REASONABLE (DUE) CARE “NOT FOLLOWING PROFESSIONAL STANDARDS”
3) MATERIAL MISSTATEMENT
4) PRIVITY “CPA HAS DUTY ONLY TO CLIENTS OR FORESEEN THIRD PARTIES
5) SUFFERED LOSS/INJURY

Question 5

WHAT ARE THE PARTIES THAT HAVE PRIVITY IN STATES THAT HAVE ADOPTED A MAJORITY RULE?

Answer 5

1) CLIENT
2) INTENDED PARTIES/ KNOWN PARTIES “ANY SPECIFIC” PARTY A CPA KNEW WOULD RELY ON THE FINANCIAL STATEMENTS.
3) FORESEEN PARTIES “ANY PARTY THE CPA GENERALLY KNOWS OR FORESEES WILL RELY ON THE CPA SERVICES.

Question 6

WHAT ARE THE PARTIES THAT HAVE PRIVITY IN STATES THAT HAVE ADOPTED A MINORITY/ULTRAMARES RULE?

Answer 6

1) CLIENT
2) INTENDED THIRD PARTY
*PARTIES WHO RELY ON THE F/S (INCLUDING REASONABLY FORESEEABLE AND UNFORESEEN PARTIES) AND SUFFER A LOSS CAN SUE FOR FRAUD OR GROSS NEGLIGENCE BUT NOT COMMON LAW NEGLIGENCE.

Question 7

WHAT ARE THE ELEMENTS NECESSARY TO PROVE ACTUAL FRAUD OR GROSS NEGLIGENCE (CONSTRUCTIVE FRAUD)? RIMS

Answer 7

FRAUD REFERS TO THE INTENT TO DECEIVE, AND TAKES TWO BASIC FORMS

A) ACTUAL FRAUD: CPA MAKES STATEMENTS KNOWING THAT THEIR FALSE (IE SCIENTER)
B) GROSS NEGLIGIENCE (CONTRUCTIVE FRAUD) RECKLESS DISREGARD FOR THE TRUTH

1) RELIANCE - PLAINTIFF RELIED ON FINANCIAL INFORMATION “NO NEED FOR PRIVITY”
2) INTENT TO DECEIVE.
2A) ACTUAL FRAUD “CPA KNEW THE FINANCIAL INFORMATION WAS FALSE I.E., SCIENTER
2B) GROSS NEGLIGENCE CPA RECKLESSLY DISREGARDED THE TRUTH
3) MATERIAL MISSTATEMENT
4) SUFFERED LOSS