Under what common law theories may professionals be liable to clients? Under what common law...

• Under what common law theories Under what common law theories may professionals be liable to clients?may professionals be liable to clients?• What are the rules concerning an What are the rules concerning an

auditor’s liability to third parties?auditor’s liability to third parties?• How might an accountant violate How might an accountant violate

federal securities laws? federal securities laws?

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2

• What crimes might an accountant What crimes might an accountant commit under the Internal Revenue commit under the Internal Revenue Code?Code?• What constrains professionals to keep What constrains professionals to keep

communications with their clients communications with their clients confidential?confidential?


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


• Liability for Breach of ContractLiability for Breach of Contract. . If If professional breaches (express or professional breaches (express or implied) the terms of a contract, then implied) the terms of a contract, then the client has the right to recover the client has the right to recover damages from the professional.damages from the professional.–Damages include expenses incurred

by client to hire another professional.


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

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

Disclaimers.


• Liability for NegligenceLiability for Negligence (cont’d). (cont’d). –Accountant’s Duty of Care.• Unaudited Financial Statements.• 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.–(3) The client was also negligent.


• Liability for NegligenceLiability for Negligence. (cont’d). . (cont’d). –Attorneys Duty of Care: ABA Rules of

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

negligence).


• Liability For FraudLiability For Fraud. . Elements: Elements: (1) (1) misrepresentation of a material fact, (2) intent misrepresentation of a material fact, (2) intent to deceive, (3) reliance on misrepresentation, to deceive, (3) reliance on misrepresentation, (4) damages.(4) damages.–CASE 42.1 Walsh v. State Walsh v. State (2009). Under

the circumstances, do you think the sanction was too harsh?


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

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


• The The Restatement Restatement RuleRule. Majority of . Majority of courts have rejected courts have rejected UltramaresUltramares and and adopted the view that accountants are adopted the view that accountants are liable to clients and foreseeable users: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.


• The “Reasonably Foreseeable Users” The “Reasonably Foreseeable Users” RuleRule..–An attorney is generally not liable to a third

party unless the attorney has committed fraud (or malicious conduct). –CASE 42.2 Perez v. Stern Perez v. Stern (2010). What if the

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


• Public Company Accounting Public Company Accounting Oversight Board: Oversight Board: reports to SEC.reports to SEC.• ApplicabilityApplicability to Public Accounting to Public Accounting

Firms.Firms.• RequirementsRequirements for Maintaining for Maintaining

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


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

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


• Liability under the 1933 Securities ActLiability under the 1933 Securities Act..•Defenses to Liability Under Section 11:–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.© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15

• Liability under the 1933 Securities ActLiability under the 1933 Securities Act..–Liability under Section 12(2).

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


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

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


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

silence).


• Criminal Violations of Securities Criminal Violations of Securities LawsLaws..• Criminal Violations of Tax LawsCriminal Violations of Tax Laws..


• Attorney-Client Relationships.Attorney-Client Relationships.–Client holds the privilege of

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

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


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