1. © 2004 West Legal Studies in Business A Division of Thomson Learning 1 Chapter 52 Liability of Accountants and Other Professionals Chapter 52 Liability of Accountants and Other Professionals

2. © 2004 West Legal Studies in Business A Division of Thomson Learning 2 § 1: Common Law Liability to Clients Under the common law, professionals may be liable to clients for:  Breach of contract.  Negligence.  Fraud. Under the common law, professionals may be liable to clients for:  Breach of contract.  Negligence.  Fraud.

3. © 2004 West Legal Studies in Business A Division of Thomson Learning 3 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. 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.

4. © 2004 West Legal Studies in Business A Division of Thomson Learning 4 Liability for Negligence E lement 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. E lement 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.

5. © 2004 West Legal Studies in Business A Division of Thomson Learning 5 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. Elements to establish fraud:  Misrepresentation of a material fact.  Intent to deceive.  Reliance on misrepresentation.  For damages, the innocent party must have been injured.

6. © 2004 West Legal Studies in Business A Division of Thomson Learning 6 § 2: 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.  Case 52.1: Stroud v. Arthur Anderson & Co. (2001). 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.  Case 52.1: Stroud v. Arthur Anderson & Co. (2001).

7. © 2004 West Legal Studies in Business A Division of Thomson Learning 7 Liability to Third Parties Liability to Reasonably Foreseeable Users.  Accountants should be liable to those whose use of their reports or financial statements is reasonably foreseeable. Liability to Reasonably Foreseeable Users.  Accountants should be liable to those whose use of their reports or financial statements is reasonably foreseeable.

8. © 2004 West Legal Studies in Business A Division of Thomson Learning 8 § 3: The Sarbanes-Oxley Act of 2002 Applicability to Public Accounting Firms.  Title I of the Act: Public Company Accounting Oversight Board.  Title II of the Act: Auditor Independence.  Document Destruction. Applicability to Public Accounting Firms.  Title I of the Act: Public Company Accounting Oversight Board.  Title II of the Act: Auditor Independence.  Document Destruction.

9. © 2004 West Legal Studies in Business A Division of Thomson Learning 9 § 4: Liability of Accountants under Securities Laws Liability under the 1933 Securities Act.  Liability under Section 11 for misstatements and omissions.  Liability to Purchasers of Securities.  Case 52.2: Lee v. Ernst & Young LLP (2002).  Due Diligence Standard. Burden on accountants to verify information provided to them. Liability under the 1933 Securities Act.  Liability under Section 11 for misstatements and omissions.  Liability to Purchasers of Securities.  Case 52.2: Lee v. Ernst & Young LLP (2002).  Due Diligence Standard. Burden on accountants to verify information provided to them.

10. © 2004 West Legal Studies in Business A Division of Thomson Learning 10 Defenses to Liability under 1933 Act Accountant acted with due diligence. 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. Case 52.3: Endo v. Arthur Anderson & Co. (1999). Accountant acted with due diligence. 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. Case 52.3: Endo v. Arthur Anderson & Co. (1999).

11. © 2004 West Legal Studies in Business A Division of Thomson Learning 11 Liability Under the 1934 SEC Act Liability under Section 18.  Includes attorneys fees.  Good Faith Defense. 10(b) and Rule 10b-5 Liability.  Scheme to defraud.  Untrue, material statements. Liability under Section 18.  Includes attorneys fees.  Good Faith Defense. 10(b) and Rule 10b-5 Liability.  Scheme to defraud.  Untrue, material statements.

12. © 2004 West Legal Studies in Business A Division of Thomson Learning 12 § 5: Potential Criminal Liability of Accountants Securities Act of 1933. Securities Act of 1934. Internal Revenue Code. State and Federal Criminal Codes. Sarbanes-Oxley:  Securities filing that includes false or misleading certified audit  up to $5Million fine and 20 years in prison. Securities Act of 1933. Securities Act of 1934. Internal Revenue Code. State and Federal Criminal Codes. Sarbanes-Oxley:  Securities filing that includes false or misleading certified audit  up to $5Million fine and 20 years in prison.

13. © 2004 West Legal Studies in Business A Division of Thomson Learning 13 § 6: 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. 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.

14. © 2004 West Legal Studies in Business A Division of Thomson Learning 14 § 7: Confidentiality and Privilege Confidentiality.  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!). Confidentiality.  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!).

15. © 2004 West Legal Studies in Business A Division of Thomson Learning 15 Law on the Web Financial Accounting Standards Board. Sarbanes-Oxley 2002: American Institute of Certified Public Accountants website. Sarbanes-Oxley 2002: American Institute of Certified Public Accountants website. Legal Research Exercises on the Web. Financial Accounting Standards Board. Sarbanes-Oxley 2002: American Institute of Certified Public Accountants website. Sarbanes-Oxley 2002: American Institute of Certified Public Accountants website. Legal Research Exercises on the Web.