CPA's Legal Liability Flashcards
4 things to prove CPA negligence
- Duty of CARE
- BREACH of that duty
- HARM to the plaintiff (cause/effect)
- DAMAGES (monetary)
What happens if no cause & effect relationship can be established between harm and CPA negligence?
CPA is not liable for the damages
Is contributory negligence by the plaintiff a defense for the CPA?
Not in most states. Most states have adopted COMPARITIVE NEGLIGENCE for plaintiff to recover a percentage of damages.
CPA fails to confirm receivables, receivables overstated, client bankruptcy, causes bank to lose money on loan to client. What are the 4 parts of negligence?
- CPA had a duty of professional care and competence when performing audit to confirm receivables.
- CPA failed to confirm receivables and therefore breached duty of care.
- Cause/Effect - Failed to confirm, receivables overstated on f/s.
- Damages - money; bank lost money when client declared bankruptcy.
Is an honest error of judgement considered CPA negligence?
No
If a CPA breaches a contract and NO fraud or negligence is found, who can sue?
Just the client.
No third parties can sue because they do not have privity.
If CPA breaches contract and negligence IS found, who can sue?
- Client
- Third parties who suffer money damages as a result of the breach
**Remember, negligence opens the door!
Can a party known to the CPA to be relying on work sue the CPA for ordinary contract breaches?
Yes, the third party has privity since they are known to the CPA.
Can a third party sue a CPA for negligence if they lack privity of contract with the CPA?
Yes, in a majority of states, a limited class of third parties such as CREDITORS and INVESTORS (not members of the general public) can sue a CPA for ordinary neglience.
What is the rule called where CPAs are only held liable to the client and known third party beneficiaries for ordinary negligence? Where is this applicable?
The Ultramares Rule
Only upheld in a minority of states.
In a majority of states, who can sue the CPA for ordinary negligence?
- client
- known 3rd party beneficiaries
- limited class of parties that could be “foreseen parties” to rely upon the f/s (creditors/investors) (party must have actually relied on statements)
Who can sue the CPA for Common Law Fraud?
Anyone can sue the CPA if they can prove fraud on the part of the CPA.
4 parts to prove FRAUD
- Material OMISSION of fact
- INTENT to deceive
- Justifiable RELIANCE on CPA
- DAMAGES - money
Anyone can sue! Even general public.
If the CPA is reckless in regard to the rights of others, what is this considered?
Constructive fraud / gross negligence
(not actual fraud or actual negligence)
Members of the general public can sue for constructive fraud!
Order 4 charges from least serious to most serious
- Breach of contract
- Ordinary negligence
-Gross negligence/Constructive Fraud
“CPA reckless”
-Actual (common law) Fraud - stealing/lying
Constructive Fraud vs. Actual Fraud
Actual Fraud requires all 4 elements to be proven
Constructive Fraud - can’t prove intent to deceive
Which of the 4 elements is lacking if the CPA is found to commit Constructive Fraud/Gross Negligence?
Intent to Deceive
“Scienter”
SEC Act of 1933
vs.
SEC Act of 1934
1933: IPOs
1934: Transactions after IPO
1933 Act
Forced a company about to go public to:
-Disclose information (amount of debt, pending lawsuits, largest shareholders, intent for money raised at IPO)
So investors can make informed decisions!
What does an injured party have to prove to sue under the 1933 Act?
- Bought the stock
- Material error in audited f/s
- Lost money
No need to prove negligence or fraud
CPA is guilty under the 1933 Act until they can prove
Due Diligence (followed PCAOB, GAAP)
CPA has burden of proof!
What does the plaintiff have to prove to sue under the 1933 Act?
- They bought the securities
- There was a material error
- Lost money
No need to prove fraud or negligence
Why was the 1934 Act passed?
To make the SEC a watchdog over the securities markets.
Registration of companies
Reporting Requirements: Annual report (10K), Quarterly Reports (10Q)
What Act are these items covered under?
Securities Act of 1934
Under the 1934 Act, in order for the CPA to be sued, what must the plaintiff prove?
Must prove FRAUD on the part of the CPA, that the CPA acted in bad faith, RELIANCE ON THE F/S.
CPA is innocent until proven guilty.
Is reliance on the financial statements needed to sue under the 1933 Act?
No, only under the 1934 Act.
In regards to who can sue the CPA for negligence, what is often the correct answer?
“any foreseen parties”
