Ch 5: CPA Legal Liability

Question 1

In what 3 ways can CPA legal liability arise?

Answer 1

• breach of contract
• commission of a tort (negligence, fraud, or constructive fraud)
• violation of a statute (e.g., Section 11, Rule 10b-5, or tax law liability)

Question 2

To make out a case for negligence, the plaintiff must show what?

Answer 2

1. the defendant owed a duty of care to the plaintiff
2. the defendant breached that duty by failing to act with due care
3. the breach caused plaintiff’s injury, and
4. damages

Question 3

To whom may a CPA be liable for negligently performing an engagement?

Answer 3

Under the majority rule, a CPA is liable to the client and any person or limited forseeable class of persons whom the CPA knows will be relying on the CPA’s work.

Under the minority Ultramares decision, a CPA can only be liable to the client and intended 3rd parties (named) shown to be in privity of contract with the CPA.

Question 4

Gross neglience is also known as?

Answer 4

Constructive fraud

Question 5

To whom may a CPA be liable for fraudulently performing an engagement or performing an engagement with gross negligence?

Answer 5

Anyone who relied on the CPA’s work and incurred damages as a result.

Question 6

What are the defenses available to a CPA against a charge of negligence?

Answer 6

• no duty - remote plaintiff
• no breach - compliance with GAAS/GAAP
• no casual connection - knowledge

Question 7

State whether the plaintiff can recover compensatory or punitive damages from a CPA in each of the following types of action:

1. breach of contract
2. ordinary negligence
3. fraud
4. constructive fraud (gross negligence)

Answer 7

1. breach of contract - compensatory
2. ordinary negligence - compensatory
3. fraud - compensatory and punitive
4. constructive fraud (gross negligence) - compensatory and punitive

Question 8

What are the elements of fraud?

Answer 8

“MAIDS”

1. a misrepresentation of material fact
2. intent to deceive (knowledge the statement was false), scienter
3. actual and justifiable reliance by plaintiff on the misrepresentation
4. an intent to induce plaintiff’s reliance of the misrepresentation, and
5. damages

Question 9

What is the difference between fraud and constructive fraud?

Answer 9

Constructive fraud (gross negligence) has the same elements of fraud, except instead of intentionally deceiving, the defendant acts recklessly (i.e. without regard for professional procedures or standards), which constitutes gross negligence.

Question 10

Under what conditions may a CPA disclose confidential client info without the client’s consent?

Answer 10

• to defend against a lawsuit brought by a client (court proceeding)
• in response to a subpoena or summons
• as part of a review of a member’s professional practice
• to a surviving member of the accountant’s firm