Accountant's Liability

Question 0

What generates the majority of litigation against accountants?

Answer 0

Audits

Question 1

What are the 2 primary functions of accountants?

Answer 1

1 auditing financial statements

2 rendering opinions about those audits

Question 2

What 2 uniform standards of professional conduct must CPAs comply with.

Answer 2

1 generally accepted accounting principles GAAP

2 generally accepted auditing standards GAAS

Question 3

GAAP

Answer 3

Standards for preparation and presentation of financial statements

Question 4

Generally Accepted Auditing Standards GAAS

Answer 4

Specify methods and procedures that must be used to conduct

Audits

Question 5

Audit define

Who must it be performed by?

Answer 5

Verification of company’s books and records

Must be performed by an independent CPA

Question 6

An accountant’s failure to follow GAAS when conducting audits
Constitutes…

Answer 6

Negligence

Question 7

Unqualified opinion

Answer 7

Represents an auditor’s finding that the company’s financial
Statements fairly represent company’s financial position

Most favorable opinion an auditor can give

Question 8

Qualified opinion

Answer 8

States financial statements are fairly represented except for
Departure from GAAP, a change in accounting principles or
Material uncertainty

The exception is noted in auditor’s opinion

Question 9

Adverse opinion

Answer 9

Financial statements don’t fairly represent company’s financial
Position

Usually issued when auditor determines that company materially
Misstated certain items in its financial statements

Question 10

Disclaimer of opinion

Answer 10

Expresses auditor’s inability to draw conclusion of accuracy

Of financial records

Question 11

The issuance of other than an unqualified opinion

Answer 11

Can have substantial adverse effects on company audited

Question 12

What business form are most accounting firms organized as?

Answer 12

Limited liability partnerships

Question 13

Limited liability partners

Answer 13

All partners are limited partners who lose only their capital
contribution in the LLP if the LLP fails

Limited partners aren’t personally liable for debts and obligations
Of the LLP unless negligent or intentional conduct causes injury

Question 14

What 3 legal theories hold accountants liable to their clients?

Answer 14

1 breach of contract

2 fraud

3 negligence

Question 15

Terms of engagement

Answer 15

Specified when accountant and client enter into a contract

Question 16

Breach of contract

Answer 16

Accountant who fails to perform contract

Question 17

2 Damages for breach of contract

Answer 17

1Expenses client incurs in securing another accountant to
Perform needed services

2 Fines/penalties for clients missed deadlines and lost opportunities

Question 18

Actual fraud

What kind of damages are awarded for actual fraud?

Answer 18

Intentional misrepresentation or omission of material fact that
Is relied on by client and causes client damage

Punitive damages are awarded for actual fraud

Question 19

Constructive fraud AKA Gross negligence

Answer 19

Accountant acts with reckless disregard for truth or consequence
Of his or her actions

Question 20

Negligence AKA Accountant Malpractice

Answer 20

When accountants fail to use reasonable care, knowledge, skill
And judgement when providing auditing and other accounting
Services, preparing unaudited financial statements

Question 21

If an audit turns up a suspicious transaction or entry the accountant…

Answer 21

Is under duty to investigate it and inform client of results of
Investigation

Question 22

Violations of GAAPs and GAASs

Answer 22

Are prima facie evidence of negligence

Question 23

Who are the third parties in cases of liability of accountants to third parties?

Answer 23

Plaintiffs including shareholders, bond holders, creditors, banks
Who relied on info supplied by auditor

Question 24

What are the 3 major rules of liability that a state may adopt in determining whether an accountant is liable in negligence to 3rd parties?

Answer 24

1 ultramares doctrine 2 section 552 of the Restatement (Second) of Torts 3 foreseeability standard

Question 25

Holding in Ultramares Corporation v. Touche

Answer 25

Accountant can't be held liable for negligence unless plaintiff Private contract or had private relationship with accountant

Question 26

Ultramares Doctrine

Answer 26

In order for plaintiff to have standing, they must have private Contract/ relationship with accountant

Question 27

Section 522 of the Restatement (second) of Torts

Answer 27

``` Account is liable for negligence to any member of limited class of Intended users for whose benefit the accountant has been employed ``` To prepare client's financial statements or to whom accountant Knows client will supply copies of financial statements

Question 28

Under Section 522 of the Restatement (second) of Torts, adopted by many states, what does the accountant not have to know to be held liable?

Answer 28

The specific name of the third party

Question 29

Foreseeability standard, for holding accountants liable to third parties for negligence (adopted in a few states)

Answer 29

Accountant is liable go any foreseeable user of the client's Financial statements ``` The accountant's liability does not depend on his knowledge Of identity of user or intended class of users ```

Question 30

Third parties and Privity of contract with accountants

Answer 30

Third parties can't sue accounts for breach of contract because Third parties are merely incidental beneficiaries They don't acquire any rights under the accountant client contract As they aren't in privity of contract

Question 31

Section 10A to Securities and exchange Act of 1934

Answer 31

Imposes duties of auditor to detect and report illegal acts | committed by their clients

Question 32

Section 11(a) of Securities Act of 1933, Imposes civil liability on accountants and others for... 2 things

Answer 32

1 making misstatements or omissions of material facts in registration statement 2 failing to find such misstatements or ommissions

Question 33

Due diligence defense to liability

Answer 33

Accountant avoids liability if he, after reasonable investigation And reasonable grounds at time of registration to believe Statements were true And there was no omission of material fact

Question 34

Section 10(b) of Securities Exchange Act of 1934

Answer 34

Prohibits any manipulative or deceptive practice in connection With purchase or sale of any security

Question 35

Rule 10b-5

Answer 35

Makes it unlawful for any person by means of instrumentality Or interstate commerce to employ any device or artifice to defraud To make misstatements of material fact, any act of fraud in Connection with security

Question 36

Who can sue under Section 10(b) and Rule 10b-5

Answer 36

Only buyers and sellers of securities Privity of contract is irrelevant

Question 37

Section 18(a) of the Securities Exchange Act of 1934

Answer 37

Imposes civil liability on any person who makes false or misleading statements of material fact in any application, report or document Filed with SEC

Question 38

2 ways an accountant or another defendant can defeat the imposition of liability under Section 18(a)

Answer 38

1 defendant can show they acted in good faith 2 can show plaintiff had knowledge of false or misleading statement when securities were purchased or sold

Question 39

Joint and several liability

Answer 39

Where one party (defendant) of several at-fault parties could Be made to pay all of a judgement

Question 40

Proportionate liability

Answer 40

Limits defendants liability to its proportionate degree of fault

Question 41

Private Securities Litigation Reform Act of 1995, what to things did it do?

Answer 41

1 more difficult for plaintiffs to bring class action securities lawsuits 2 replaced joint and several liability with proportionate liability, Unless defendant acted knowingly

Question 42

Section 24 of Securities Act of 1933, Tax Reform Act of 1976, RICO, Section 32(a) of the Securities Exchange Act of 1934: penalties

Answer 42

Result in criminal liabilities and fines Both involve falsifying info to the SEC

Question 43

State enacted: Uniform Securities Act section 101

Answer 43

Criminal offense for accountants and others to willfully falsify financial statements and other reports

Question 44

Sarbanes-Oxely Act of 2002

Answer 44

Imposed new rules to improve financial reporting, eliminate Conflicts of interest and provide government oversight of Accounting and audit services

Question 45

Accountant-client privilege

Answer 45

Enacted statute in about 20 states Accountant can't be called as a witness against a client in a Court action

Question 46

The accountant client privilege does not exist under both...

Answer 46

Common law And according to the Supreme Court it doesn't exist under Federal law

Question 47

Work product immunity

Answer 47

Accountant's work papers can't be discovered in court case against accountant's client Applies in some state statutes