Chapter 5 Section 4: CPA Legal Liability Flashcards
What are the three ways CPA legal liability can arise?
Breach of contract
Tort
Violation of a statute
Who can sue for breach of contract?
Anyone with privity
Do you get paid if your breach of contract is material?
No
Define tort
A wrongful act - usually negligence, fraud, and constructive fraud
What is the majority rule for the CPA’s duty to act with reasonable care?
Minority?
Any person or limited foreseeable class of persons whom the CPA knows will be relying on the work can sue Follows the Ultramares decision, and narrows down the suit potential to persons in privity of contract
Define breach
Failure to act with due care
What does actual fraud have?
MAIDS
Misrepresentation of material fact Actual and justifiable reliance on misrepresentation Intent to induce that reliance Damages Scienter
What is the difference between actual fraud and constructive fraud?
Constructive doesn’t have scienter - it’s recklessness
Who are you liable to for fraud?
Anyone who proves MAIDS
What are the five levels of fault?
- Reasonable care = no negligence = not liable
- Lack of reasonable care = ordinary negligence
- Lack of slight care = gross negligence or constructive fraud
- Actual fraud = intent to deceive
- Criminal fraud = intent to deceive
What needs to be proven for negligence regarding Section 11 of 1933 Act?
LAM
Loss
Acquired the stock
Material misrepresentation
What needs to be proven for fraud regarding Rule 10b-5 of the 1934 Act?
MAIDS
What if the accountant in the audit detects information of illegal acts?
Tell the audit committee, and if they don’t do anything, report it to the Board of Directors, who needs to tell the SEC within one day. If they don’t, the accountant needs to.
Is there accountant-client privilege under federal law?
No
Can an accountant show a prospective purchaser their workpapers?
Yes, but they can’t show confidential information
