2. Under what common law theories may professionals be liable to clients? Under what common law theories may professionals be liable to clients? What are the rules concerning an auditor’s liability to third parties? What are the rules concerning an auditor’s liability to third parties? How might an accountant violate federal securities laws?  How might an accountant violate federal securities laws?  © 2012 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. 2

3. What crimes might an accountant commit under the Internal Revenue Code? What crimes might an accountant commit under the Internal Revenue Code? What constrains professionals to keep communications with their clients confidential? What constrains professionals to keep communications with their clients confidential? © 2012 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. 3

4. Under the common law, professionals may be liable to clients for: Under the common law, professionals may be liable to clients for: – Breach of Contract.  – Negligence.  – Fraud.  © 2012 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. 4

5. 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. 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. © 2012 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. 5

6. Liability for Negligence. E lement to establish negligence: Liability for Negligence. E lement to establish negligence: – Accountant’s Duty of Care. GAAP and GAAS. Global Accounting Rules: International Financial Reporting Standards (IFRS). Audits, Qualified Opinions, and Disclaimers.  © 2012 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. 6

7. Liability for Negligence (cont’d). Liability for Negligence (cont’d). – Accountant’s Duty of Care. Unaudited Financial Statements. 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. – (3) The client was also negligent. © 2012 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. 7

8. Liability for Negligence. (cont’d). Liability for Negligence. (cont’d). – Attorneys Duty of Care: ABA Rules of Professional Conduct. Misconduct. Liability for Malpractice (professional negligence). © 2012 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. 8

9. Liability For Fraud. Elements: (1) misrepresentation of a material fact, (2) intent to deceive, (3) reliance on misrepresentation, (4) damages. Liability For Fraud. Elements: (1) misrepresentation of a material fact, (2) intent to deceive, (3) reliance on misrepresentation, (4) damages. Walsh v. State – CASE 42.1 Walsh v. State (2009). Under the circumstances, do you think the sanction was too harsh? © 2012 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. 9

10. The Ultramares Rule : Accountants should be liable only to those with whom they are in privity or “near privity” of contract. 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.  © 2012 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. 10

11. The Restatement Rule. Majority of courts have rejected Ultramares and adopted the view that accountants are liable to clients and foreseeable users: 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. © 2012 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. 11

12. The “Reasonably Foreseeable Users” Rule. The “Reasonably Foreseeable Users” Rule. – An attorney is generally not liable to a third party unless the attorney has committed fraud (or malicious conduct). Perez v. Stern – CASE 42.2 Perez v. Stern (2010). What if the children had suffered no harm as a result of the attorney’s malpractice? © 2012 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. 12

13. Public Company Accounting Oversight Board: reports to SEC. Public Company Accounting Oversight Board: reports to SEC. Applicability to Public Accounting Firms. Applicability to Public Accounting Firms. Requirements for Maintaining Working Papers. Maintained for up to seven (7) years. Requirements for Maintaining Working Papers. Maintained for up to seven (7) years. © 2012 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. 13

14. Liability under the 1933 Securities Act. Liability under the 1933 Securities Act. – Liability under Section 11: for misstatements and omissions in registration statements. The Due Diligence Standard. Defenses to Liability.  © 2012 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. 14

15. Liability under the 1933 Securities Act. Liability under the 1933 Securities Act. Defenses to Liability Under Section 11: – 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. © 2012 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. 15

16. Liability under the 1933 Securities Act. Liability under the 1933 Securities Act. – Liability under Section 12(2). Liability under the Securities Exchange Act of 1934. Liability under the Securities Exchange Act of 1934. – Liability under Section 18. Includes attorneys fees. Good Faith Defense.  © 2012 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. 16

17. Liability under the Securities Exchange Act of 1934 (cont’d). 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. © 2012 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. 17

18. Private Securities Litigation Reform Act of 1995. Private Securities Litigation Reform Act of 1995. – Proportionate Liability. – Aiding and Abetting (can include silence). © 2012 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. 18

19. Criminal Violations of Securities Laws. Criminal Violations of Securities Laws. Criminal Violations of Tax Laws. Criminal Violations of Tax Laws. © 2012 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. 19

20. Attorney-Client Relationships. Attorney-Client Relationships. – Client holds the privilege of confidentiality. Although Sarbanes- Oxley now requires attorneys to report violations. Accountant-Client Relationship. Accountant-Client Relationship. – Not privileged under federal laws. © 2012 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. 20