1. Chapter 42 Liability of Accountants & Other Professionals

2. Learning Objectives
Summarize areas in which professionals may be liable at common law?
Outline liability that may be imposed on accountants under the securities laws.
Identify accountants potential criminal liability.
State professionals’ privileges concerning working papers.
Explain the protection of professionals and their clients for their communications.

3. Common Law Liability to Clients
Under the common law, professionals may be liable to clients for:
Breach of contract.
Negligence.
Fraud.

4. 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.
Not on time or did not complete work.
Professional performed work below standard of care of professional peers.

5. Liability for Negligence
Element to establish negligence:
Duty of care existed.
Breach of duty.
Plaintiff suffered an injury.
Breach of duty was the cause of injury.
All professionals are subject to standards of conduct established by codes of professional standards and ethics, by state statutes, and by judicial decisions.

6. Liability For Fraud Elements to establish fraud:
Misrepresentation of a material fact.
Intent to deceive.
Reliance on misrepresentation.
For damages, the innocent party must have been injured.

7. 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.
The Restatement of Torts Rule.
Accountants should be liable to foreseen, or known, users of their reports or financial statements.
Liability to Reasonably Foreseeable Users.
Accountants should be liable to those whose use of their reports or financial statements is reasonably foreseeable.

8. Potential Statutory Liability of Accountants
Liability under the Securities Act of 1933.
Liability under Section 11.
Liability to Purchasers of Securities.
Due Diligence Standard.
Defenses.
Penalties and Sanctions.

9. Liability of Accountants
Liability under the Securities Exchange Act of 1934
Liability under Section 18.
Liability under Section 10(b) and SEC Rule 10b-5.
Private Securities Litigation Reform Act of 1995.

10. Potential Criminal Liability
Securities Act of 1933.
Securities Act of 1934.
Internal Revenue Code.
State and Federal Criminal Codes.

11. Working Papers
Professional has custodial ownership of client’s working papers. She may:
Keep for own protection and lawsuit defense.
Not reveal without client’s permission or, in some states, court order.

12. Confidentiality and Privilege
Professionals are restrained by the ethical tenets of their profession to keep all communications with their clients confidential.
Privilege: Right to refuse to testify against client in a court of law.
Attorneys.
In all state and federal courts.
Accountants
Only in some states’ courts.
Not in federal court (IRS!).

13. Limiting Professionals’ Liability
Professionals may be able to limit liability by disclaiming it. However, clients do have the right to rely on a professional legal or accounting opinion.
Limitation of liability from other professionals in LLP or PC situations.