Legal Duties and Responsibilities

Question 1

What occurs when the breach of a contract is minor?

Answer 1

In common law, if a breach is only minor, the non-breaching party is not discharged from the terms and conditions of the contract, but is entitled to damages.

Question 2

Define implied agreement.

Answer 2

To perform in a non-negligent manner, consistent with the standards of the profession.

Question 3

Define “breach of contract”.

Answer 3

Failure to perform substantially as agreed under contract.

Question 4

List the two types of agreements.

Answer 4

1. Express
2. Implied

Question 5

What types of damages can a tax client recover?

Answer 5

Compensatory damages, but not punitive.

Question 6

List the elements of recovery.

Answer 6

1. Duty
2. Breach
3. Damages
4. Proximate Cause

Question 7

List the sources for which standards should be followed by a tax professional.

Answer 7

State and Federal statutes, Court decisions, Contract with client, Generally Accepted Accounting Principles (GAAP) and Generally Accepted Auditing Standards (GAAS), Customs of the Profession.

Question 8

Define “standard”.

Answer 8

That degree of judgment and skill possessed by a reasonable accountant under all the circumstances.

Question 9

Define “negligence”.

Answer 9

The performance of a contract in a careless manner. Negligence does not lead to punitive damages.

Question 10

Define “actual fraud.”

Answer 10

Fraud is an intentional tort that is made with scienter or a knowledge to deceive.

Question 11

Define “constructive fraud”.

Answer 11

Reckless disregard or gross negligence.

Question 12

What must be proven by a contracting party to establish the defense of fraud?

Answer 12

1. Misrepresentation or omission of fact
2. Materiality
3. Scienter
4. Reasonable reliance
5. Damages

Question 13

Describe the Reasonable Foreseeability Approach to accountant liability.

Answer 13

The Accountant is liable to whomever s/he can reasonably foresee may use the financial statements s/he certifies or prepares.

Question 14

Describe the Privity Approach of Ultra mares v. Touche to accountant liability.

Answer 14

The Accountant is liable only to those with whom s/he is in privity of contract.

Question 15

List the three primary approaches to accountant liability.

Answer 15

The Privity Approach of Ultramares v. Touche. The Restatement “Limited Class” Approach. The Reasonable Foreseeability Approach.

Question 16

Describe the Restatement “Limited Class” Approach to accountant liability.

Answer 16

The Accountant has third party liability to a limited class of known or intended users of financial statements whose specific identity need not be known by the CPA.

Question 17

Describe the Foreign Corrupt Practices Act.

Answer 17

A United States federal law known primarily for two of its main provisions, one that addresses accounting transparency requirements under the Securities Exchange Act of 1934 and another concerning bribery of foreign officials.

Question 18

What brought about the Foreign Corrupt Practices Act?

Answer 18

Post-Watergate response to illegal foreign bribes paid by U.S. companies.

Question 19

What is the focus of Internal Accounting Controls?

Answer 19

These controls focus on Asset Accountability.

Question 20

True or false: Sarbanes-Oxley Section 404: Assessment of internal control supplements the Foreign Corrupt Practices Act’s internal accounting controls with internal financial controls.

Answer 20

True.

It supplements FCPA’s Internal Accounting Controls with Internal Financial Controls.

Question 21

What is the focus of Internal Financial Controls?

Answer 21

These controls focus on the integrity of information flowing into the financial statements.

Question 22

Describe the Racketeer Influenced Corrupt Organizations Act.

Answer 22

Commonly referred to as the RICO Act, the Act is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization. The RICO Act focuses specifically on racketeering, and it allows for the leaders of a syndicate to be tried for the crimes which they ordered others to do or assisted them, closing a perceived loophole that allowed someone who told a man to, for example, murder, to be exempt from the trial because they did not actually do it.

Question 23

List the four elements of a violation of the Racketeer Influenced Corrupt Organizations Act as outlined in Section 1962(c) of the Act.

Answer 23

A violation of Section 1962(c), requires (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.

Question 24

What is the purpose of the Racketeer Influenced Corrupt Organizations Act?

Answer 24

To prevent organized crime’s infiltration into legitimate business.

Question 25

True or False: The Racketeer Influenced Corrupt Organizations Act provides for only criminal penalties.

Answer 25

False.

The Act provides for extended criminal penalties and a civil cause of action for organized crime.

Question 26

Describe the condition that must exist for the attachment of mail or wire fraud liability.

Answer 26

Use of mail or wires must be an essential part of the fraudulent scheme for liability to attach.

Question 27

List the two federal fraud provisions under which accountants can be held criminally liable.

Answer 27

Mail fraud and wire fraud.

Question 28

What actions are considered a crime under the Sarbanes-Oxley Act with regard to the destruction of evidence?

Answer 28

Destruction of records; Willful failure to retain audit review work papers; Corrupt tampering with documents to be used in an official proceeding.

Question 29

Describe the Sarbanes-Oxley federal securities crime provision.

Answer 29

Whoever knowingly executes, or attempts to execute, a scheme or artifice–(1) to defraud any person in connection with any security [of a public company]; or (2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any security of an issuer [of a public company]…shall be fined under this title, or imprisoned not more than 25 years, or both.

Question 30

Describe the whistleblower protection under the Sarbanes-Oxley Act.

Answer 30

The act punishes those who retaliate against whistleblowers that lawfully provided information to their supervisors or the federal government regarding conduct believed to be in violation of the securities law.

Question 31

List the activities that are punishable under the Sarbanes-Oxley Act.

Answer 31

1. Failure to retain audit records for seven years.
2. Destruction of records in federal matter.
3. Corrupt tampering with documents.

Question 32

What does the Bank Secrecy Act require of taxpayers?

Answer 32

This Act requires taxpayers to report foreign bank accounts.

Question 33

What does the acronym GAPP stand for?

Answer 33

Generally Accepted Privacy Principles

Question 34

List the two actions that are punishable conditions under §7216 of the Internal Revenue Code.

Answer 34

1. Disclosing any information obtained in preparation of a tax return.
2. Using information for any purpose other than to prepare a return.

Question 35

List the six conditions under which disclosure of client information is acceptable.

Answer 35

1. Client consents;
2. GAAP calls for disclosure;
3. Enforceable summons;
4. Ethical examination;
5. Peer review;
6. To others in firm on “need to know” basis.

Question 36

List the exceptions to a practitioner’s privilege as outlined in the Internal Revenue Code §7525.

Answer 36

1. Criminal matters;
2. U.S. matters not before IRS or federal courts;
3. State or local tax matters;
4. Written tax shelter advice.

Question 37

List some examples of when evidentiary privilege is not recognized.

Answer 37

• State common law;
• Federal common law;
• Most states’ statutes.

Question 38

To what items do accountant-client privilege apply?

Answer 38

An accountant is prohibited from sharing work papers with anyone without the client’s permission (except in certain situations) and may not disclose information obtained during work performed in testimonials unless subpoenaed and relevant to a court case.