Accountant Liability

Question 1

3 actions a CPA will be liable to a tax client for damages

Answer 1

1. Failing to file return in timely manner
2. Failing to advise client of certain elections
3. Neglecting to evaluate joint or separate returns resulting in higher tax liability

Question 2

Breach of contract

Answer 2

result of non-performance
Who sue: anyone in privity can, 3rd party beneficiary named by client.
Plaintiff prove: [MILE]
Material misstatement in FS
Info in FS was cause of harm
Loss as result of above
Error, cause by breach
Defense: didn't breach, fully performed

Question 3

Negligence

Answer 3

Who sues: in privity; anyone known or foreseen (except if not in privity for Ultramares states)
Plaintiff prove: [MILE]
Material misstatement in FS
Info in FS was cause of harm and RELIED on
Loss as result of above
Error- no due care/NEGligent (Nondisclosure of info to client, errors discovered not corrected, GAAS/GAAP not followed)
Defenses: followed GAAS, lack of privity, not proximate cause of loss.

Question 4

Gross negligence

Answer 4

Who sues: Anyone, unforeseen
Plaintiff prove all [RIMS]:
Reliance on F/S
Intent to deceive (actual/constructive)
Material misrep/omission, 
Suffered a loss
Defenses: Conducted w/ GAAS, acted in good faith, lack privity

Question 5

1933 Act and auditor’s liability

Answer 5

Suffered loss (no obligation to prove reliance)
Material misrepresentation (No privity)
then burden shifts to auditor to prove..
Due diligence
Plaintiff knew of the material misstatement before purchase

Question 6

1934 Act and liability

Answer 6

Same as common law fraud (gross negligence)
Must prove [RIMS]:
Reliance on F/S
Intent to deceive (actual/constructive)
Material misstatement, omission of fact
Suffered a loss as a result of above
* Negligence is not enough to hold CPA liable

Question 7

1995 Private Securities Litigation Reform Act

Answer 7

RIG:
Related party transactions
Illegal acts
Going concern
* Mus notify SEC, auditor given 1 day to either resign from engagement or notify SEC of failure of board to make filing

Question 8

What did the Ultramares court decision rule?

Answer 8

That third parties who are not in privity of contract with the accountants cannot sue for negligence (though they can sue for gross negligence).

Question 9

Diff between gross negligence and scienter

Answer 9

Gross negligence (constructive fraud) is the extreme, flagrant, or reckless departure from the standards of due care and competence  
Actual intent to deceive (scienter)

Question 10

Defenses available to CPA under common law negligence suit

Answer 10

Not negligent or fraudulent.
Contributory negligence of the client caused the loss.
Adhered to GAAS and planned audit examination to search for material fraud.
The error was immaterial.
The proximate cause of loss was not the erroneous financial statements.

Question 11

Constructive Fraud and what’s needed to prove

Answer 11

Gross Negligence- making false statements w/ a reckless disregard for truth [MR RID]
Misrepresentation
Reckless disregard for truth
Reliance
Intent to rely
Damages

Question 12

Actual Fraud and what’s needed to prove

Answer 12

Making false statements w/ knowledge of their falsity
[MS RID]
Misrepresentation- material misrep of fact
Scienter- intent to deceive
Reliance
Intent to rely
Damages