Chapter 20 Legal Liability Cases Flashcards
What is privity?
Privity means the auditor can be sued for breach of contract. When privity exists, a plaintiff usually need only show that the defendant accountant was negligent—showed lack of reason- able care in the performance of professional accounting tasks. If negligence is proved, the accountant may be liable, provided the client did not contribute to his or her own harm.
Privity refers to the direct relationship of parties to a contract. Accountants owe contracting parties (e.g. clients) a duty not to be negligent. Liability can be imposed for ordinary negligence by the accountant.
What is primary beneficiary?
Primary beneficiaries are the third parties for whom the audit or other accounting service is primarily per- formed. A beneficiary will be identified, or reasonably foreseeable, by the accountant prior to or during the engage- ment, and the accountant will know that his or her work will influence the primary beneficiary’s decisions.
A primary beneficiary is the party an accounting service is intended to benefit, a known or reasonably foreseen users. Accountants can be liable for ordinary negligence.
What is a foreseeable beneficiary?
foreseeable beneficiaries—creditors, investors, or potential investors who rely on accountants’ work.
Foreseeable beneficiaries are the creditors, investors, or potential investors the accountant can figure to use financial statements. Accountants’ liability is not entirely clear. Some courts have ruled liability for ordinary negligence, while others have required more-than-ordinary to trigger liability.
When generally may a public accounting firm be liable to third parties? pg 1023
If the courts conclude that the auditor is associated with misleading financial statements, even if these statements are in conformity with GAAP, they may conclude that the auditors are fraudulently negligent.
With reference to page 111, how can practising auditors take specific action to minimize their liability?
a) Be wary of what kind of clients are accepted
b) know (thoroughly) the client’s business (KNOB)
c) perform quality audits:
i) Use qualified, properly trained and supervised, and motivated personnel
ii) Obtain sufficient appropriate evidence (including proper elicitation of oral evidence and documentation of client’s oral evidence).
iii) Prepare good working papers
iv) Obtain engagement and representation letters.
What is scienter?
scienter is either knowledge of falsity or insufficient basis of information
What is gross negligence?
gross negligence—lack of minimum care in performing professional duties, indicating reckless disregard for duty and responsibility
