M4-Legal Duties and Responsibilities Flashcards
An accountant is prohibited from showing the workpapers to anyone without the client’s permission, except:
- Lawful subpoena
- Prospective purchasers, as long as the prospective purchasers do not disclose the confidential information
- Quality control panel
- AICPA/State Trial Board
- Court proceedings
- When GAAP requires disclosure of such information in the F/S.
The elements of constructive fraud are:
- misrepresentation of a material fact
- defendant acts with gross negligence or recklessly
- intent to induce plaintiff’s reliance
- actual and justifiable reliance by plaintiff
- damages
Actual fraud requires intent to deceive.
ULTRAMARES limits the accountant’s liability for negligence to:
- parties in privity
- intended third party beneficiaries;
parties who are merely “foreseen” cannot recover.
A suit for common law fraud may succeed only if the accountant acted with scienter (knew that the statement was wrong or recklessly disregarded the truth). (true or false)
true
Contributory negligence is a defense to negligence in some jurisdictions, but is not a defense to fraud.
The majority rule is that accountants are liable to anyone in a class (such as potential lenders or investors) of third parties whom the CPA knows will rely on the opinion of the financial statements. (true or false)
true
In all states, the CPA’s liability extends beyond the client.
A creditor of a client generally cannot sue the client’s accountant for negligence unless the accountant had reason to know that the creditor would be relying on the accountant’s work. (true or false)
true
Lack of privity is a viable defense if the plaintiff is the client’s creditor who sues the accountant for negligence.
If the action is based on fraud, privity is not a defense; the accountant generally can be held liable to anyone who is injured by the accountant’s fraud.
If the plaintiff can prove gross negligence, privity is not a defense; the accountant generally is liable to anyone who is injured by gross negligence.
Reckless departure from standards of due care constitutes gross negligence, which is also called constructive fraud. A CPA who commits constructive fraud is liable to all plaintiffs, not just those with whom the CPA dealt or of whom the CPA knew. (true or false)
true
Although a CPA generally is liable to third parties only for fraud or constructive fraud (gross negligence), where the CPA knows that the third party will be relying on the audit, the CPA can be liable to the third party for mere negligence ( the CPA owes the third party a duty of care since the third party is an intended beneficiary of the engagement). An action for gross negligence requires both reliance on a misstatement and negligence. (true or false)
true
Common law fraud requires a showing of intent to deceive, which is scienter. (true or false)
true
For a cause of action for negligence, the client must prove at least that the CPA failed to exercise due care. (true or false)
true
Knowledge of the irregularities without reporting them to the client would constitute fraud. This is not the minimum that must be proved for negligence.
A client can maintain a cause of action against a CPA for simple negligence; gross negligence need not be proved.
Scienter is not required for negligence.
Negligence has 4 elements:
- duty of care,
- breach (wich is lack of due care)
- causality (proximate cause)
- injury
When a CPA breaches a contract for professional services, the client and any third party beneficiary of the contract are entitled to compensatory money damages. (true or false)
true
Generally specific performance (an order to perform as agreed) is available only in a contract for the sale of rare or unique property. Specific performance is not available to enforce a personal service contract, for such an order would constitute an order for involuntary servitude. (true or false)
true
Punitive damages are not available in a contract action. (true or false)
true
Rescission is the cancellation of a contract. It is available after a breach, but usually the non breaching party will choose to recover its money damages instead of canceling. (true or false)
true
