CPA Legal Liability

Question 1

CPA legal liability can arise in 3 ways:

Answer 1

1) Breach of Contract
2) Tort (Negligence, Fraud or Constructive Fraud
3) Violation of a Statute (1933 or 1934)

Question 2

Best Defense for Breach of Contract

Answer 2

Client’s failure to let the CPA see any accounting records is a failure to cooperate and is a valid defense. “Hinders”

Question 3

In General with a Breach of Contract who can sue?

Answer 3

Contract liability requires “Privity” - only a party to the contract can sue (Client and named 3rd party)

Question 4

Damages for Breach

Answer 4

Usual - client or third-party is entitled to recover compensatory damages (sufficient $ to compensate for the contract not have been performed)

If the CPA’s breach is material, the CPA is not entitled to payment for services.

Question 5

Commission of A Tort (Negligence, Fraud and Constructive Fraud)

Answer 5

Plaintiff must show:

1) owed duty of care to the plaintiff
2) breached that duty w. failure to act w. due care
3) the breach caused the plaintiff injury, and
4) damages.

Examples:

1) Failure to warn client of a known internal control weakness.
2) Failure to properly supervise/review work being done by others.

Question 6

Ordinary Negligence - to whom is the duty owed?

Answer 6

Most states - limited foreseeable class of persons whom the CPA knows will be relying on the CPA’s work(i.e.-lenders, investors)

A few states - limits CPA liability more narrowly to persons in Privity of contract = clients and named intended third party beneficiaries.

Question 7

Scienter - definition

Answer 7

with “intent” or “Knowledge of wrongdoing”.
(either an intent to deceive or gross negligence, which is the reckless disregard for the truth); negligence is insufficient to establish scienter.

Lack of Scienter is best defense for FRAUD