Chapter 30: Liability of Accountants and other Professionals

1. Chapter 30: Liability of Accountantsand other Professionals

2. Learning Objectives • Under what common law theories may professional be liable to clients? • What are the rules concerning an auditor’s liability to third parties? • How might an accountant violate federal securities laws? 

3. Learning Objectives • What crimes might an accountant commit under the Internal Revenue Code? • What constrains professionals to keep communications with their clients confidential?

4. Potential Common Law Liability to Clients • Under the common law, professionals may be liable to clients for: • Breach of Contract.  • Negligence.  • Fraud. 

5. Potential Common Law Liability to Clients • 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.

6. Potential Common Law Liability to Clients • 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. 

7. Potential Common Law Liability to Clients • 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. 

8. Potential Common Law Liability to Clients • 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.

9. Potential Common Law Liability to Clients • 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.

10. Potential Common Law Liability to Clients • 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?

11. Potential Common Law Liability to Clients • 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?

12. Potential Liability to Third Parties • 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. 

13. Potential Liability to Third Parties • 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.

14. Potential Liability to Third Parties • “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?

15. The Sarbanes-Oxley Act • 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.

16. Potential Liability of Accountants under Securities Laws • Liability under the 1933 Securities Act. • Liability under Section 11: for misstatements and omissions in registration statements. • The Due Diligence Standard. • Defenses to Liability. 

17. Potential Liability of Accountants under Securities Laws • 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.

18. Potential Liability of Accountants under Securities Laws • Liability under Section 12(2). • Liability under the Securities Exchange Act of 1934. • Liability under Section 18. • Includes attorneys fees. • Good Faith Defense. 

19. Potential Liability of Accountants under Securities Laws • Liability under Section 12(2). • Liability under the Securities Exchange Act of 1934. • Liability under Section 18. • Includes attorneys fees. • Good Faith Defense. 

20. Potential Liability of Accountants under Securities Laws • 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.

21. Potential Liability of Accountants under Securities Laws • Private Securities Litigation Reform Act of 1995. • Proportionate Liability. • Aiding and Abetting (can include silence).

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

23. Confidentiality and Privilege • 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.