chapter 30: liability of accountants and other professionals
DESCRIPTION
Chapter 30: Liability of Accountants and other Professionals. 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? . - PowerPoint PPT PresentationTRANSCRIPT
1
Chapter 1: Legal EthicsCHAPTER 30: LIABILITY OF
ACCOUNTANTSAND OTHER
PROFESSIONALS
2© 2013 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.
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?
3© 2013 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.
Learning Objectives4. What crimes might an accountant commit
under the Internal Revenue Code?5. What constrains professionals to keep
communications with their clients confidential?
4© 2013 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.
Potential Common Law Liability to Clients
Under the common law, professionals may be liable to clients for:–Breach of Contract. –Negligence. –Fraud.
5© 2013 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.
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© 2013 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.
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© 2013 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.
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© 2013 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.
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© 2013 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.
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© 2013 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.
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© 2013 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.
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?
© 2013 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.
Potential Liability to Third Parties
12
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.
© 2013 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.
Potential Liability to Third Parties
13
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.
© 2013 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.
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?
© 2013 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.
• 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
15
© 2013 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.
Potential Liability of Accountants under Securities
Laws
16
Liability under the 1933 Securities Act.–Liability under Section 11: for
misstatements and omissions in registration statements.• The Due Diligence Standard.• Defenses to Liability.
© 2013 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.
Potential Liability of Accountants under Securities
Laws
17
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.
© 2013 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.
Potential Liability of Accountants under Securities
Laws
18
–Liability under Section 12(2). Liability under the Securities Exchange
Act of 1934.–Liability under Section 18.• Includes attorneys fees.• Good Faith Defense.
© 2013 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.
Potential Liability of Accountants under Securities
Laws
19
–Liability under Section 12(2). Liability under the Securities Exchange
Act of 1934.–Liability under Section 18.• Includes attorneys fees.• Good Faith Defense.
© 2013 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.
Potential Liability of Accountants under Securities
Laws
20
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.
© 2013 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.
Potential Liability of Accountants under Securities
Laws
21
Private Securities Litigation Reform Act of 1995. –Proportionate Liability.–Aiding and Abetting (can include
silence).
© 2013 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.
Potential Criminal Liability• Criminal Violations of Securities Laws.• Criminal Violations of Tax Laws.
22
© 2013 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.
Confidentiality and Privilege
23
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.