chapter 30: liability of accountants and other professionals

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Chapter 1: Legal EthicsCHAPTER 30: LIABILITY OF

ACCOUNTANTSAND OTHER

PROFESSIONALS

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Learning Objectives1. Under what common law theories may

professional be liable to clients?2. What are the rules concerning an auditor’s

liability to third parties?3. How might an accountant violate federal

securities laws?


Learning Objectives4. What crimes might an accountant commit

under the Internal Revenue Code?5. What constrains professionals to keep

communications with their clients confidential?


Potential Common Law Liability to Clients

Under the common law, professionals may be liable to clients for:–Breach of Contract. –Negligence. –Fraud.



Liability for Breach of Contract. –If professional breaches (express or

implied) the terms of a contract, then the client has the right to recover damages from the professional.–Damages include expenses incurred by

client to hire another professional.



Liability for Negligence. –Elements to establish negligence:• A duty of care existed.• That duty of care was breached.• The plaintiff suffered a legal injury.• The injury was proximately caused by the

defendant’s breach of the duty of care.



Liability for Negligence. –Accountant’s Duty of Care.• GAAP and GAAS.• Global Accounting Rules: International

Financial Reporting Standards (IFRS).• Audits, Qualified Opinions, and

Disclaimers.• Unaudited Financial Statements.



Liability for Negligence.–Accountant’s Duty of Care.• Defenses to Negligence: –(1) The accountant was not negligent. –(2) If the accountant was negligent, this

negligence was not the proximate cause of the client’s losses.



Liability for Negligence.–Accountant’s Duty of Care.• Defenses to Negligence: –(3) The client was also negligent (depending

on whether state law allows contributory negligence or comparative negligence as a defense.



Liability for Negligence.–Attorneys Standard of Care: ABA Rules

of Professional Conduct.•Misconduct.• Liability for Malpractice (professional

negligence).–CASE 30.1 KELLEY V. BUCKLEY (2011). What

were the genuine issues of material fact the court found?



Liability for Negligence.–Liability For Fraud. Elements: (1)

misrepresentation of a material fact, (2) intent to deceive, (3) reliance on misrepresentation, (4) damages.–CASE 30.2 WALSH V. STATE (2009).

What does “reflect adversely” mean?

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Potential Liability to Third Parties

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The Ultramares Rule: Accountants should be liable only to those with whom they are in privity or “near privity” of contract.–Requirement of Privity.–Modification to Allow “Near Privity”: liability

if third party has sufficient “nexus” with an accountant.



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The Restatement Rule. Majority of courts have rejected Ultramares and adopted the view that accountants are liable to clients and foreseeable users:– Persons intended to be benefit and guided by the

information, and– Persons whom the accountant intends the

information to influence or knows that the recipient so intends.



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“Reasonably Foreseeable Users” Rule.–Generally an accountant or attorney is not

liable to a third party unless the attorney has committed fraud (or malicious conduct). However the Restatement rule may apply to attorneys as well as accountants. –CASE 30.3 PEREZ V. STERN (2010). What if

the children had suffered no harm as a result of the attorney’s malpractice?


• Public Company Accounting Oversight Board: reports to SEC.

• Applicability to Public Accounting Firms.• Requirements for Maintaining Working

Papers. Maintained for up to seven (7) years.

The Sarbanes-Oxley Act

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Potential Liability of Accountants under Securities

Laws

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Liability under the 1933 Securities Act.–Liability under Section 11: for

misstatements and omissions in registration statements.• The Due Diligence Standard.• Defenses to Liability.



Laws

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Defenses to Liability. –NO misstatements or omissions.–Any misstatement or omission was not

material.–The misstatement or omission was not

the cause of the injury.–Purchaser knew of misstatements or

omissions.



Laws

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–Liability under Section 12(2). Liability under the Securities Exchange

Act of 1934.–Liability under Section 18.• Includes attorneys fees.• Good Faith Defense.



Laws

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–Liability under Section 12(2). Liability under the Securities Exchange

Act of 1934.–Liability under Section 18.• Includes attorneys fees.• Good Faith Defense.



Laws

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Liability under the Securities Exchange Act of 1934 (cont’d).–Liability under Section 10(b) and SEC

Rule 10b-5.• Scope of Accountants’ Liability.• Requirements for Recovering Damages.



Laws

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Private Securities Litigation Reform Act of 1995. –Proportionate Liability.–Aiding and Abetting (can include

silence).


Potential Criminal Liability• Criminal Violations of Securities Laws.• Criminal Violations of Tax Laws.

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Confidentiality and Privilege

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Attorney-Client Relationships.–Client holds the privilege of

confidentiality. Although Sarbanes-Oxley now requires attorneys to report violations.

Accountant-Client Relationship.–Not privileged under federal laws.

chapter 30: liability of accountants and other professionals

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