Miller_BLTC12E_PPT_ch40.pptx

BUSINESS LAW TodaySTANDARD EDITION TEXT & SUMMARIZED CASES, 12e

Roger LeRoy Miller

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Liability of Accountants and Other Professionals

Chapter 40

Chapter Outline

40-1 Potential Liability to Clients

40-2 Potential Liability to Third Parties

40-3 Liability of Accountants under Other Federal Laws

40-4 Potential Criminal Liability

40-5 Confidentiality and Privilege

Learning Objectives (slide 1 of 2)

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

What are the rules concerning an auditor’s liability to third parties?

How might an accountant violate the Securities Act?

What crimes might an accountant commit under the Internal Revenue Code?

Learning Objectives (slide 2 of 2)

What is protected by the attorney-client privilege?

40-1 Potential Liability to Clients

40-1a Liability for Breach of Contract

Accountants and other professionals face liability under the common law for any breach of contract.

40-1b Liability for Negligence

A duty of care existed.

That duty of care was breached.

The plaintiff suffered an injury.

The injury was proximately caused by the defendant’s breach of the duty of care.

40-1b Liability for Negligence (slide 1 of 2)

Accountant’s Duty of Care

GAAP and GAAS

Accountants must comply with generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS).

Discovering Improprieties

Audits

An audit is a systematic inspection, by analyses and tests, of a business’s financial records by an auditor.

Qualified Opinions and Disclaimers

Unaudited Financial Statements

Defenses to Negligence

40-1b Liability for Negligence (slide 2 of 2)

Attorney’s Duty of Care

All attorneys owe a duty to provide competent and diligent representation.

Misconduct

Case Example 40.3 In re Disciplinary Proceedings against Johns (2014)

Liability for Malpractice

In malpractice cases, the plaintiff must prove that the attorney’s breach of the duty of care actually caused the plaintiff to suffer some injury.

Landmark in the Law

The SEC Adopts Global Accounting Rules

International Financial Reporting Standards (IFRS)

Will take years to completely implement

40-1c Liability for Fraud

Fraud (or fraudulent misrepresentation) involves the following elements:

A misrepresentation of a material fact.

An intent to deceive.

Justifiable reliance by the innocent party on the misrepresentation.

Actual Fraud

Case Example 40.5 Walsh v. State of Neb. (2009)

Constructive Fraud

Conduct that is treated as fraud under the law even when there is no proof of intent to defraud

40-2 Potential Liability to Third Parties (slide 1 of 3)

40-2a The Ultramares Rule

A rule regarding an accountant’s liability to third parties that is based on privity of contract

Classic Case Example 40.7 Ultramares Corp. v. Touche (1931)

The Requirement of Privity

Case Example 40.8 Toro Co. v. Krause, Kern & Co. (1987)

“Near Privity” Modification

40-2 Potential Liability to Third Parties (slide 2 of 3)

40-2b The Restatement Rule

Under the Restatement (Third) of Torts, an accountant’s liability extends to the following:

Persons for whose benefit and guidance the accountant “intends to supply the information or knows that the recipient intends to supply it.”

Persons whom the accountant “intends the information to influence or knows that the recipient so intends.”

40-2 Potential Liability to Third Parties (slide 3 of 3)

40-2c The “Reasonably Foreseeable Users” Rule

A minority of courts hold accountants liable to any users whose reliance on an accountant’s statements or reports was reasonably foreseeable.

Most courts view the Restatement’s approach as more reasonable because it allows accountants to control their exposure to liability.

40-2d Liability of Attorneys to Third Parties

40-3 Liability of Accountants under Other Federal Laws

40-3a The Sarbanes-Oxley Act

The Public Company Accounting Oversight Board

A body that oversees the audit of public companies that are subject to securities laws

Requirements for Maintaining Working Papers

Working papers: The documents used and developed by an accountant during an audit, such as notes, computations, and memoranda.

40-3b The Securities Act of 1933

Liability under Section 11

Section 11 of the act imposes civil liability on accountants for misstatements and omissions of material facts in registration statements.

The Due Diligence Standard

Other Defenses to Liability

Liability under Section 12(2)

Section 12(2) of the act imposes civil liability for fraud in relation to offerings or sales of securities.

40-3c The Securities Exchange Act of 1934 (slide1 of 2)

Liability under Section 18

Section 18 liability applies only to applications, reports, documents, and registration statements filed with the SEC.

Under Section 18, a seller or purchaser must prove one of the following:

False or misleading statement affected price

Purchaser or seller relied on false or misleading statement to make purchase or sale; not aware of inaccuracy of statement

40-3c The Securities Exchange Act of 1934 (slide 2 of 2)

Liability under Section 18

Good Faith Defense

Other Defenses

Liability under Section 10(b) and Rule 10b-5

Prohibited Conduct

It is unlawful for any person to use, in connection with the purchase or sale of any security, any manipulative or deceptive device or contrivance in contravention of SEC rules and regulations.

Extent of Liability

40-3d The Private Securities Litigation Reform Act

An auditor must use adequate procedures in an audit to detect any illegal acts of the company being audited.

If something illegal is detected, the auditor must disclose it to the company’s board of directors, the audit committee, or the SEC, depending on the circumstances.

Proportionate Liability

Aiding and Abetting

40-4 Potential Criminal Liability

40-4a Criminal Violations of Securities Laws

Accountants may be subject to criminal penalties for willful violations of the 1933 Securities Act and the 1934 Securities Exchange Act.

40-4b Criminal Violations of Tax Laws

The Internal Revenue Code makes it a felony to willfully make false statements in a tax return or to willfully aid or assist others in preparing a false tax return.

40-5 Confidentiality and Privilege

40-5a Attorney-Client Relationships

An attorney and her or his employees may not discuss the client’s case with anyone—even under court order—without the client’s permission.

40-5b Accountant-Client Relationships

The majority of states abide by the common law, which provides that an accountant must disclose information about his or her client to the court, if a court so orders.

Exhibit 40-1 Three Basic Rules of Accountant’s Liability to Third Parties

Exhibit 40–1 Three Basic Rules of Accountant’s Liability to Third Parties

RULE	DESCRIPTION	APPLICATION
Ultramares rule	Liability is imposed only if the accountant is in privity, or near privity, with the third party.	A minority of courts apply this rule.
Restatement rule	Liability is imposed only if the third party’s reliance is foreseen, or known, or if the third party is among a class of foreseen, or known, users.	The majority of courts have adopted this rule.
“Reasonably foreseeableusers” rule	Liability is imposed if the thirdparty’s use was reasonablyforeseeable.	A small minority of courts use this rule.

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