Adv. Business Law- Ch 34: Liability Of Accountants And Other Professionals

Front 1

Basics of Liability

Back 1

• Many sources of law imposing liability
• many bases for imposing liability
• many parties to whom can be held liable
• bottom line: be sure that you are adequately insured

Front 2

Sources of Liability

Back 2

• Common law (state law, so differs)
o Negligence
o Contract
o Fraud (3 bad things in one-tort, contract, and/or criminal)
• Statute (mostly fed but also state)
o E.g. ’33 act, ’34 act, sox

Front 3

Professional Liability for Negligence (Malpractice): need all of the following

Back 3

o duty
o breach
o injury-
o actual causation
o proximate (foreseeability) causation

Front 4

Liability is held to what standard?

Back 4

held to standard of the profession
o comply with GAAP and GAAS
o accountants are not required to discover every fraud in the books
• if the fraud is not discovered because of the accountants negligence, will be liable
o violation of GAAP or GAAS is evidence of negligence
o however, compliance with GAAP or GAAS does not mean the accountant cannot be held to a higher standard by state laws or judge decisions

Front 5

Special CPA Liability Issues

Back 5

o most professionals services directly benefit only the client
o accountants' audits and audit opinions are for the benefit of persons other than the client
o this both broadens and complicates accountant liability issues

Front 6

Defenses to Negligence

Back 6

o 1. The accountant was not negligent
o 2. If the accountant was negligent, this negligence was not the proximate cause of the loss
o 3. The client was also negligent (only okay in states where contributory negliance as a defense)

Front 7

Liability for Actual Fraud

Back 7

o 1. A misrepresentation of a material fact has occurred
o 2. There is an intent to deceive
o 3. The innocent party has justifiably relied on the misrepresentation
o 4. To obtain damages, the innocent party must have been injured

Front 8

Liability for Constructive Fraud

Back 8

o Whether or not acted with fraudulent intent
o Paula accepts a reason for financial irregularities, even if it seems illegal = conduct characterized as intentional failure to perform a duty in reckless disregard of the consequences of such failure, gross negligence and held to be constructive fraud

Front 9

Professionals' Contract Liability

Back 9

• based on terms of contract between professional and client
• must "do what you say you'll do”
• usually, only parties to the contract can sue (usually only the client)
• in some cases, an intended 3rd party can recover (ch 12)

Front 10

Accountants’ Negligence Liability

Back 10

• Duty: follow generally accepted auditing standards
• breach: failure to do so
• injury: financial loss
• actual cause: breach -> loss
• proximate cause: loss was of this plaintiff foreseeable

Front 11

Accountants' Negligence Issues- Breach

Back 11

o Problem in financial statements does not necessarily mean that there was an audit failure
• Rules of GAAS
• audits involve audit judgment, so failure to uncover problem not always means a breach
• work papers are CPA's evidence

Front 12

Accountants' Negligence Issues- actual cause

Back 12

o Did audit lapse cause the loss, i.e. would proper audit have uncovered the problem?

Front 13

Accountants' Negligence Issues- Proximate Cause

Back 13

o Should CPA have expected that this particular plaintiff would suffer loss, given the breach of duty (failure to follow GAAS)
o How far out from client should CPA’s liability extend?
• Who uses the product of the CPA?
• Does the CPA know this?
• CPA Obligations:
 To client?
 To other users?
 To society?

Front 14

Accountants' Negligence Issues- Proximate Cause- Ultramares rule/doctrine

Back 14

 NY 1931: liable if privity (only if you are in a contract w/ client)
 Extended in 1985 to “near privity”

Front 15

Accountants' Negligence Issues- Proximate Cause- Ultramares rule/doctrine

Back 15

 summarize what all states do, in the majority states- To foreseen or known users or class (s)
 for example, renew line of credit with first bank. User is first bank. Renew line of credit with various possible creditors. Than there are more users

Front 16

Practical Implications regarding CPA's (regarding liability)

Back 16

• Liability variations do not affect CPA’s duty
• variations in extent of liability might affect insurance rates
• small town/big city differences in duty are mostly gone today