Chapter 11 book (Liability of Accountants)

Question 1

a legal action filed against a professional person for failure to act in accordance with prevailing professional standards

Answer 1

malpractice action

Question 2

most malpractice cases are based on theories of

Answer 2

• negligence
• breach of contract
  or
• fraud

Question 3

3 primary types of liability assessed to accountants under the common law

Answer 3

1. negligence
2. breach of contract
3. fraud

Question 4

an accountant is liable for _____ if he or she fails to exercise the care of a competant, reasonable professional and that failure causes loss or injury to the client

Answer 4

negligence

Question 5

to prove _____ by the accountant, the plaintiff establishes the basic elemenets of ______

Answer 5

negligence

Question 6

the 4 basic elements of negligence

Answer 6

1. duty
2. breach of duty
3. causation
4. damages

Question 7

at minimum the _______ of accountants entails compliance with GAAP and GAAS

Answer 7

duty of care

Question 8

1. the accountant can deny failing to meet the professional standards
2. regardless of failure, an accountant can argue that the failure is not the cause of the clients loss
3. in a few states, and accountant may argue contributory or comparative negligence
   these are defenses to being charged with ?

Answer 8

negligence

Question 9

are accountants liable or not liable for the contents of an unaudited financial statements

Answer 9

not liable

Question 10

• makes certaine xplicit and implicit promises
• explicity, the accountant agrees to perform the contractual tasks. implicity, the accountant agrees to complete the work in a competant and professional manner according to professional standards

Answer 10

engagement letter

Question 11

failure to fufill the explicit and implicit agreements in an engagement letter can subject an accountant to liability based on

Answer 11

breach of contract

Question 12

1. the accountant misrepresented a material fact
2. the accountant acted with the intent to decieve
3. the client justifiably relied on the misrepresentation
4. the client suffered an injury by relying on the fraudulent information

Answer 12

all the following must occur for an accountant to be found liable to his or her client for fraud
(actual fraud)

Question 13

is fraud without fraudelent intent– a plaintiff must prove that the accountant was grossly negligent in performing his or her duties

Answer 13

constructive fraud

Question 14

3 general groupings that third party liability, as decided by the states, falls into

Answer 14

1. privity or near privit
2. foreseen users and classes of users
3. reasonably foreseeable users

Answer 15

privity of contract

Answer 16

near privity or primary benefit test

Question 17

holds an accountant liable to known third party users of the accountants work product and also to those in the limited class whose reliance on the work the accountant specifucally foresaw

Answer 17

restatement test

Question 18

holds an accountant liable to any third party who was or should have been foreseen as possible user of the accountants work product and who did in fact use and relu on that work product for a proper business purpose

Answer 18

reasonably foreseeable users test

Question 19

the various documents used and developed during an audit, including notes calculations, copies, memorandums, and other papers consitituting the accountatnts work product

Answer 19

working papers

Question 20

after an audit who is the legal owner of the working paprts

Answer 20

the accountant

Question 21

an accountant may not disclose working papers unless

Answer 21

1. the client consents
   or
2. the court orders the documents

Question 22

the right of an accountant to not reveal any information given in confidence by a client. the privelage is not granted by every state or by the federal government

Answer 22

accountant client privelage

Question 23

accountants are civilly liable for misstatements and omissions of material facts made in registration statements the SEC requires

Answer 23

the securities act of 1933
whehn a person buys a security covered by a registration statement that contains false information or is missing information, the accountant who helped prepare and file the statement may be liable for damages

Question 24

to recover damages, the plaintiff someone who purchased a security covered by a flawed registration statements does not need to prove

Answer 24

reliance on the statements or establish privity

Question 25

under section _____ an accountant is not liable if part of registration investigation reasonable ground to believe and did believe at the time such part of the registration statemnt became effective, that the statements therin were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading

Answer 25

section 11 securities act of 1933

Question 26

under the securities act 1933, and accountant can prove _____ by showing that he or she did not act fraudelently or negligentlu in preparing the registration statements in question or that no misstatements or omissiones exist

Answer 26

due diligence

Question 27

to argue that the misstatements or omissions did not occue as a result of the financial statement created by the accountant but were made by another party

Answer 27

one more defense available to an accountant under the securities act 1933

Question 28

every person who, by or through stock ownership, agency, or otherwise controls any person liable under section 11 or 12, shall also be liable jointly and severally with and to the same extenet as such controlled person to any person to whom such controlled person is liable

Answer 28

section 15 of the securities act 1933

Question 29

this section is typically used to charge executive board members or other high levell officials who fail to use a reasonable standrd of care when running their business

Answer 29

section 15 of the securities act 1933

Question 30

to establish liability in section 15 of the securities act 1933 a plaintiff must prove

Answer 30

control on the part of the defendant and an underlying claim under sections 11 or 12`

Answer 31

the securities exchange act of 1934

Answer 32

securities exchange act of 1934 section 18

Question 33

section 18 statute of limitations for recovery requried that the action be brought within ____ years of discovering the fraud and withing _____ years of its occurence

Answer 33

1 year 3 years

Question 34

imposes liability for negligence in performing an audit or constructing a financial statement

Answer 34

securities act

Question 35

imposes liability for making fraudulent statements to the SEC

Answer 35

securities exchange act

Question 36

under the securities exchange act the plaintiff must prove two things to recover damanges

Answer 36

1. the false or misleading statement in question actually affected teh price of the security 2. reliance was placed on the false or misleading statement without knowledge of its inaccuracy

Question 37

do the securities or exchange act require privit

Answer 37

no

Question 38

do the securities or exchange act require demonstration of reliance on the false or misleading statement

Answer 38

- securites act: no - exchange act: yes

Question 39

instead of requiring due diligence like the securities act, the exchange act uses

Answer 39

good faith

Question 40

the accountant did not now the financial statement was false or misleading and did not intend to use the falsity to gain an unfair advantage over another person

Answer 40

good faith

Question 41

3 things to prove the absense of good faith

Answer 41

1. scienter 2. reckless conduct 3. gross negligence in the accountants actions

Question 42

the accountant knowlingly committed an illegal act

Answer 42

scienter

Question 43

a second defense to exchange act, the accountant can prove

Answer 43

the plaintiff knew the statements in question were false

Question 44

to recover damages under section 10(b) from the liable accountant, a buyer or seller of a security must prove each of the following six elements

Answer 44

1. status as purchaser or seller (privity not required) 2. scienter 3. fraudulent on the fraudulent statement 4. reliance on the fraudulent statement 5. statement in regard to a material fact 6. reliance on the statement as the cause of the plaintiffs loss

Question 45

under section 32 an accountant guilty or violating the securities exchange act can by punished with a fine of not more than

Answer 45

$5 million, imprisonment for not more than 20 years or both

Answer 46

liability under section 20(a) of the securities exchange act

Question 47

to establish liability under exchange sectionn 20 the plaintiff must show

Answer 47

1. there was a primary violation by a controlled person 2. the defendent controlled the primary violator 3. the defendant participated in a meaningful way in the primary violation

Question 48

placed new statutory obligations on accountants by requiring that they use adequate procedures when performing an audir so that they can detect any illegal acts committed by the audited company

Answer 48

private securities litagation reform act (PSLRA)

Question 49

new rules and regulations for public accounting firms in an attempt to reduce fraud in accounting practices. also created the public company accounting oversight boarf

Answer 49

sarbanes oxley act of 2002

Question 50

- outline the duties of teh board and establish new requirements and greater government oversight for public accounting firms to protect investors. the board has the power to oversee audit procedures for public companies and to ensure compliance with securities law - responsible for registering public accounting fimrs that prepare audit reports for issues . established standard for registered public accounting fimrs - is responsible for inspecting, investigating, and enforcing compliance on registered public accounting firms and anyone associated with them

Answer 50

public company accounting oversight board

Question 51

the professional failed to live up to the standard of care of his or her profession, and this breach of duty caused compensable damage to the client

Answer 51

negligence

Question 52

the professinal failed to perform his or her responsibilityes under the contract for professional services within the agreed on time

Answer 52

breach of contract

Question 53

the professional made a misstatement of a material fact that the client relied on to his or her detriment

Answer 53

fraud

Question 54

common defenses of neegligence

Answer 54

contributory or comparaitve negligence

Question 55

common defenses to breach of contract

Answer 55

the clients own actions or inactions were the cause of the professioanls failure to perform

Question 56

common defenses to fraud

Answer 56

no real defenses, other thans howing that the elements of fraud were not proved