Chapter 30: Liability of Accountants - PowerPoint Presentation

Slide1

Chapter 30: Liability of Accountants

and other Professionals

1Slide2

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?

2Slide3

Learning Objectives

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

3Slide4

Potential Common Law Liability to Clients

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

Fraud. 4Slide5

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.

5Slide6

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.

6Slide7

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.

7Slide8

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.

8Slide9

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.

9Slide10

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?10Slide11

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?11Slide12

Potential Liability to Third Parties

12The

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. Slide13

Potential Liability to Third Parties

13The

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, andPersons whom the accountant intends the information to influence or knows that the recipient so intends.Slide14

Potential Liability to Third Parties

14

“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? Slide15

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 Act15Slide16

Potential Liability of Accountants under Securities Laws

16Liability under the 1933 Securities Act.Liability under Section 11: for misstatements and omissions in registration statements.

The Due Diligence Standard.Defenses to Liability. Slide17

Potential Liability of Accountants under Securities Laws

17Defenses 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.Slide18

Potential Liability of Accountants under Securities Laws

18Liability under Section 12(2).

Liability under the Securities Exchange Act of 1934.Liability under Section 18.Includes attorneys fees.Good Faith Defense. Slide19

Potential Liability of Accountants under Securities Laws

19Liability under Section 12(2).

Liability under the Securities Exchange Act of 1934.Liability under Section 18.Includes attorneys fees.Good Faith Defense. Slide20

Potential Liability of Accountants under Securities Laws

20Liability 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.Slide21

Potential Liability of Accountants under Securities Laws

21Private Securities Litigation Reform Act of 1995. Proportionate Liability.

Aiding and Abetting (can include silence).Slide22

Potential Criminal

LiabilityCriminal Violations of Securities Laws.Criminal Violations of Tax Laws.

22Slide23

Confidentiality and Privilege

23Attorney-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.