Legal Duties and Responsibilities

Question 1

What are the 4 elements to make a case for negligence against a CPA?

Answer 1

CPA owed a duty of care to the client, the CPA breached that duty by failing to act with due care, the breach caused the plaintiff’s injury, and damages

contract liability generally requires privity, so only a party to the contract can sue under a contract theory

Question 2

CPA liability can also arise from commission of a tort. What are 3 relevant torts?

Answer 2

negligence, constructive fraud/gross negligence, and fraud

Question 3

In a case of negligence, to whom is the duty owed?

Answer 3

to the client and any person or limited foreseeable class of persons whom the CPA knows will be relying on the CPA’s work

a minority of states follow the Ultramares decision, which limits CPA liability more narrowly to persons in privity of contract with the CPA and intended third-party beneficiaries

Question 4

What are the 5 elements to make a case for fraud against a CPA?

Answer 4

a misrepresentation of material fact, intent to deceive (scienter), actual and justifiable reliance by the plaintiff on the misrepresentation, an intent to induce the plaintiff’s reliance on the misrepresentation, and damages

constructive fraud has the same elements as actual fraud except instead of scienter, the defendant acts recklessly

privity is not a defense to fraud; a CPA’s liability for fraud and constructive fraud is much broader than a CPA’s liability for negligence; the CPA can be held liable to anyone who proves the 5 elements

Question 5

T/F: workpapers belong to the accountant that prepares them, not the client and is prohibited from showing them to anyone without the client’s permission

Answer 5

True; however, there are some exceptions when an accountant doesn’t need the client’s permission

in response to a subpoena, in defense of a lawsuit brought by a client, to a quality-control review panel/peer review, in defense of an official investigation by the AICPA/state trial board, when GAAP requires disclosure of such info in the financial statements, and to a prospective purchase of the CPA’s practice as long as the purchaser does not disclose the info

although a CPA may allow a prospective purchaser to review confidential workpapers, the CPA may not turn over the workpapers to a purchaser without the client’s permission