Malpractice Liability

Question 1

Describe the Restatement “Limited Class” approach to accountant liability

Answer 1

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 2

Define “Negligence”

Answer 2

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

Question 3

Define “Breach of Contract”

Answer 3

Failure to perform substantially as agreed under contract

Question 4

Define “implied agreement”

Answer 4

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

Question 5

What occurs when the breach of a contract is minor?

Answer 5

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

Question 6

List the 2 types of agreements

Answer 6

Express or Implied

Question 7

Describe the Reasonable Foreseeability Approach to accountant liability

Answer 7

The accountant is liable to whomever he/she can reasonably foresee may use the financial statements he/she certifies or prepares

Question 8

List the elements of recovery

Answer 8

Duty, Breach, Damages, Proximate Clause

Question 9

Define “standard”

Answer 9

The degree of judgement and skill possessed by a reasonable accountant under all the circumstances

Question 10

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

Answer 10

The accountant is liable only to those with whom he/she is in privity of contract

Question 11

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

Answer 11

State and federal statutes, court decisions, contract with client, GAAP and GAAS, customs of profession

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

Define “constructive fraud”

Answer 13

Reckless disregard or gross negligence

Question 14

What type of damages can a tax client recover?

Answer 14

Compensatory damages, but not punitive

Question 15

List 3 primary approaches to accountant liability

Answer 15

1. ) Privity Approach of Ultramares v Touche
2. ) The Restatement “Limited Class” Approach
3. ) The Reasonable Foreseeability Approach

Question 16

Define “Actual Fraud”

Answer 16

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