1. Chapter 51 Accountants’ Duties and Liability

2. Learning Objectives
Describe an accountant’s liability to his or her client for breach of contract and fraud
Describe an accountant’s liability to third parties under the Ultramares doctrine
Describe an accountant’s liability to third parties under the Restatement (Second) of Torts and the foreseeability standard

3. Learning Objectives
Describe the accountant’s civil liability and criminal liability under federal securities laws
Describe the duties of accountants under the Sarbanes-Oxley Act

4. Exhibit 51.1 - Accounting Firm LLP

5. Accounting Standards and Principles
Generally accepted accounting principles(GAAPs)
Standards for preparation and presentation of financial statements
Generally accepted auditing standards(GAASs)
Standards for methods and procedures used to conduct audit
Audit
Verification of company’s books and records

6. Accountants’ Liability to Their Clients
Breach of contract
Accountant who fails to perform the terms of engagement may be sued for damages
Fraud
Actual fraud: intentional misrepresentation that causes damage to client
Constructive fraud: accountant acts with “reckless disregard” for consequence of his actions

7. Accountants’ Liability to Their Clients
Accounting malpractice(negligence)
Accountant breaches duty of reasonable care, knowledge, skill, and judgment that he owes a client when providing auditing services
Accountant may be sued for negligence
Accountants liable for negligence in preparing unaudited financial statements

8. Accountants' Liability to Third Parties
Ultramares doctrine
Accountant is liable only for negligence to third parties who are in privity of contract or in privity- like relationship with accountant
Provides a narrow standard for holding accountants liable to third parties for negligence
The majority rule for accountants’ liability for negligence in the country

9. Case 51.1: Ultramares Doctrine
Credit Alliance Corporation v. Arthur Andersen & Company
65 N.Y.2d 536, 493 N.Y.S.2d 435, Web 1985 N.Y. Lexis 15157
Court of Appeals of New York
Issue
Is Andersen liable under the Ultramares doctrine?

10. Accountants' Liability to Third Parties
Section 552 of the Restatement (Second) of Torts
Accountant is liable only for negligence to third parties who are members of a limited class of intended users of the client’s financial statements
Provides broader standard than Ultramares doctrine

11. Accountants' Liability to Third Parties
Foreseeability standard
Accountant is liable for negligence to third parties who are foreseeable users of client’s financial statements
Provides broadest standard for holding accountants liable to third parties for negligence

12. Case 51.2: Accountants’ Liability to Third Party
Johnson Bank v. George Korbakes & Company, LLP
472 F.3d 439, Web 2006 U.S. App. Lexis (2006)
United States Court of Appeals for the Seventh Circuit
Issue
Is GKCO, the auditor of Brandon, liable to Johnson Bank for negligent misrepresentation?

13. Accountants' Liability to Third Parties
Fraud
If an accountant engages in actual or constructive fraud, a third party that relies on the accountant’s fraud and is injured, may bring tort action to recover damages
Breach of contract
Third parties cannot sue accountants, as they are not in privity of contract with them

14. Securities Law Violations
Section 10A of Securities Act of 1934
Imposes duty on auditors to detect and report illegal acts committed by their clients
Section 11(a) of the Securities Act of 1933: imposes civil liability on accountants and others for
Making misstatements or omissions in registration statement
Failing to find such misstatements or omissions

15. Securities Law Violations
Section 10(b) of the Securities Exchange Act of 1934
Prohibits any manipulative or deceptive practice in connection with purchase or sale of any security
Section 18(a) of the Securities Exchange Act of 1934
Imposes civil liability on any person who makes false or misleading statements of material fact in any application filed with the SEC

16. Securities Law Violations
Private Securities Litigation Reform Act of 1995
Imposes pleading and procedural requirements that make it difficult for plaintiffs to bring class action securities lawsuits
Replaces joint and several liability of defendants with proportionate liability

17. Criminal Liability of Accountants
Section 24 of Securities Act of 1933
Untrue statements or omissions in registration statements
Section 32(a) of Securities Exchange Act of 1934
Criminal offense for person to willfully and knowingly make any false or misleading statement in any application required to be filed with the SEC

18. Criminal Liability of Accountants
Tax Reform Act of 1976
Imposes criminal liability on accountants and others who prepare federal tax returns and commit wrongdoings
Racketeer Influenced and Corrupt Organizations Act (RICO)
Provides for both criminal and civil penalties for securities fraud
State securities laws

19. Sarbanes-Oxley Act of 2002
Establishment of the Public Company Accounting Oversight Board
Public accounting firms must register with the board
Separation of audit and nonaudit services
Requires audit partner of the accounting firm to supervise and approve an audit
Prohibits employment of an accountant by a previous audit client
Public corporations must have an audit committee

20. Accountants’ Privilege and Work Papers
Accountant–client privilege
Provides that an accountant cannot be called as a witness against a client in a court action
Work product immunity
Accountant’s work papers cannot be discovered in a court case against the accountant’s client

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