Accountant Liability

Question 1

Under common law, what defines negligence?

Answer 1

Negligence is the absence of due care

Question 2

What defines an absence of due care (which, effectively, defines negligence as well)

Answer 2

Absence of due care = carelessness in:

1. Nondisclosure of material information
2. Errors previously discovered and not corrected
3. GAAS/GAAP not followed

Question 3

Can an accountant be held liable for punitive damages as a result of a breach of contract under common law?

Answer 3

No. Punitve damages cannot be assessed as a result of breach of contract, only compensatory damages.

Question 4

Under common law, what type of party can sue for breach of contract?

Answer 4

1. Anyone in privity

2. Intended 3rd parties (named in the contract)

Question 5

Under the Second Restatement of Torts, who is considered a 3rd party?

Answer 5

anyone who is known or foreseen

** in states that follow Ultramares v. Touche, foreseen is not considered in privity

Question 6

What is CAMPS, MILE, and RIMS?

Answer 6

These are all of the aspects that a plaintiff must prove in order to win a case based on negligence

Question 7

What is CAMPS?

Answer 7

C - cAUsal relationship: the behavior of the accountant caused the harm of the plaintiff
A - absence of due care: 1. nondisclosure of material items, 2. errors found but ignored/not corrected, 3. GAAS/GAAP not followed
M - material misstatements: the financial statements contained material misstatements or omissions
P - privity
S - suffered loss

Question 8

What is MILE?

Answer 8

M - Material misstatements
I - Information caused the harm
L - Loss was suffered
E - Error: error in absence of due care

Question 9

What is RIMS?

Answer 9

R - Reliance: the information was relied upon
I - Intent to deceive: scienter
M - Material misstatements
S - Suffered loss

Question 10

Which pneumonic should you use for each type of case:

1. Breach of contract
2. Negligence
3. Gross negligence/fraud

Answer 10

1. MILE
2. MILE/CAMPS
3. RIMS

Question 11

What is the difference between actual fraud and constructive fraud?

Answer 11

Actual fraud is knowledge of the information being false (scienter)

Constructive fraud (aka gross negligence) is making false statements out of recklessness

Question 12

Where is the burden of proof for all common law cases? and can punitive damages be levied?

Answer 12

For all common law cases, the burden of proof is on the plaintiff and punitive damages cannot be levied (only compensatory)

Question 13

Under the 1933 and 1934 acts, what would a plaintiff have to prove in a case against an accountant? (M.L. vs. M.L.E.)

Answer 13

Under the 1933 act, a plaintiff would have to prove material misstatements exist and a loss occurred.

Under the 1934 act, a plaintiff would have to prove material misstatements exist, a loss occurred, and an error through scienter