R4 M4 - Legal Duties & Responsibilities Flashcards
The elements of constructive fraud:
1.Misrepresentation of a material fact.
2.Defendant acts with gross negligence or recklessly.
3.Intent to induce plaintiff’s reliance.
4.Actual and justifiable reliance by plaintiff.
5.Damages.
Actual fraud requires intent to deceive.
Which of the following statements is(are) correct regarding the common law elements that must be proven to support a finding of constructive fraud against a CPA?
I.The plaintiff has justifiably relied on the CPA’s misrepresentation.
II.The CPA has acted in a grossly negligent manner.
A. I only. B. Both I and II. C. Neither I nor II. D. II only.
Choice “B” is correct.
The elements of constructive fraud:
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.
Brown & Co., CPAs, issued an unmodified opinion on the financial statements of its client, King Corp. Based on the strength of King’s financial statements, Safe Bank loaned King $500,000. Brown was unaware that Safe would receive a copy of the financial statements or that they would be used in obtaining a loan by King. King defaulted on the loan. If Safe commences an action for negligence against Brown, and Brown is able to prove that it conducted the audit in conformity with GAAS, Brown will:
A. Not be liable to Safe because Brown did not owe Safe a duty of care. B. Not be liable to Safe because there is a conclusive presumption that following GAAS is the equivalent of acting reasonably and with due care. C. Be liable to Safe because the statute of frauds has been satisfied. D. Be liable to Safe because Safe relied on the financial statements.
Choice “A” is correct. To be liable for negligence, a CPA must breach a duty of care owed to the plaintiff. A CPA’s duty of care runs only to clients and, under the majority rule, to any person or limited class of persons whom the CPA knows will be relying on the CPA’s work. Here, the facts state that Brown was unaware that anyone would be using, as a basis for granting a loan, the financial statements that Brown prepared . Thus, Safe is an unforeseeable plaintiff, and Brown did not owe Safe a duty of care and, therefore, cannot be liable to Safe in negligence.
Choice “B” is incorrect. Although following GAAS is usually a good indication that an accountant acted with due care, it does not give rise to a conclusive presumption of care.
Choice “C” is incorrect. The statute of frauds is a defense in a contract action; it is irrelevant in a tort action.
Choice “D” is incorrect because it is irrelevant. Brown did not owe Safe a duty of care and so cannot be held liable in negligence.
Choice “D” is incorrect because it is irrelevant. Brown did not owe Safe a duty of care and so cannot be held liable in negligence.
In a common law action against an accountant, lack of privity is a viable defense if the plaintiff:
A. Is the client's creditor who sues the accountant for negligence. B. Can prove the presence of gross negligence that amounts to a reckless disregard for the truth. C. Bases the action upon fraud. D. Is the accountant's client.
Choice “A” is correct. 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.
Choice “B” is incorrect. 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.
Choice “C” is incorrect. 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.
Choice “D” is incorrect. The client is always in privity of contract with the accountant.
What is privity?
A relationship between persons ( or parties) who have legal interest in the same right or property.
What is privity?
Is direct contractual relationship between two parties. A 3rd party usually is not in privity contract because the contract does not impact them directly. However, if the accountant who is doing an audit is aware of the 3rd party being influence by his audit and negligently inflates a client financial statement to get a loan, then the privity defense would not be applicable.
What are the four elements of negligence?
- Duty of Care
- Breach of Duty
- Damages
- Casuality
The element of negligence:
- This is when the defendant owed a duty of care to the plaintiff.
- There was a breach of duty of care which the defendant was negligent about
- The result was damages and injury (causality) to the plaintiff
Fraud or constructive Fraud:
- The defendant was gross negligent (reckless) in his work
- This is when there was a misrepresentation of material facts (purposefully falsify a substantial amount of information).
- There was an intent to deceive the plaintiff (Scienter)
- The plaintiff justifiably relied on the misinformation given
- The result caused damages.
Choice “B” is correct.
The elements of constructive fraud:
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.
Which of the following is an evidentiary privilege that protects communication between a CPA and the CPA’s taxpayer-client in a noncriminal tax matter before the IRS?
A. Work product privilege B. Tax practitioner privilege C. Accountant-client privilege D. Attorney-client privilege
Choice “B” is correct. The tax practitioner privilege in the Internal Revenue Code provides that the same common law protections of confidentiality that apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner. A federally authorized tax practitioner is anyone authorized to practice before the IRS, including CPAs and enrolled agents. The privilege can only be asserted in a noncriminal tax matter before the IRS or a noncriminal tax proceeding in federal court brought by or against the United States.
Choice “A” is incorrect. The work product privilege protects tangible materials produced by a CPA in preparation for litigation as requested by an attorney but not communications between the attorney and the accountant about the product.
Choice “C” is incorrect. There is no common law accountant-client privilege like there is for attorney-client, although some states provide a statutory accountant-client privilege.
Choice “D” is incorrect. The attorney-client privilege is a privilege that protects the confidentiality of communications between an attorney and the attorney’s client, not a CPA and client.
