Exam 46: Accountants Liability and Malpractice

Some states have rejected the requirement of privity but not adopted any set rule. Instead, these states function under the __________ rule.

In some states an exculpatory clause protects the accountant from a malpractice suit brought by a third party but not from a suit brought by a client.

To ensure that audit partners do not become entrenched, Sarbanes-Oxley requires audit firms to change audit partners at least once every __________ years.

The contact rule applies in which of the following states?

In states that follow ______, a third party can recover from a negligent accountant if there was an agreement between the third party and the accountant.

An accountant may be liable for malpractice if the accountant fails to detect signs that an employee of the client is embezzling.

Under the known-user rule the identity of the particular user must be known to hold the accountant liable for malpractice.

To help eliminate conflicts of interest, Sarbanes-Oxley prohibits all the following activities by audit firms for their clients, except: ______.

The Public Company Oversight Board:

Sara and Sally rely on the statements of Alice, an accountant. In a lawsuit brought by Sara and Sally against Alice for fraud, Alice seeks to avoid liability based on the fact that neither Sara nor Sally was in privity of contract with Alice. Alice knew Sara might rely on the financial information provided, but Alice did not know of Sally or anyone in her position. Can Sara and Sally recover against Alice?

Herman hires Juanita as his accountant. Juanita commits negligence in preparing financial statements for a business Herman owns. Several investors rely on the financial statements and purchase shares of stock in the business. In a state that has adopted the privity rule, what result?

Under the flexible rule some courts have rejected the requirement of privity for malpractice and approach each situation on a case-by-case basis.

An accountant guilty of malpractice can be sued: ______.

Unidentified members of a certain class may sue for negligent malpractice in states that follow the __________ rule.

When the privity rule is applied, a bank lending money to the client of an accountant cannot sue the accountant for malpractice.

One of the concerns reflected in Sarbanes-Oxley was that auditors were not exercising sufficient discretion and independence in conducting audits of their clients.

An accountant is generally not liable for damages if the accountant fails to inform a client of the tax consequences associated with selling a business.

The privity rule prevents the filing of an accounting malpractice lawsuit by a third party against an accountant.

According to the intended user rule the accountant must have furnished the information directly to the client, knowing that the client would transmit the information to other third parties.

The standards for accountants' professional liability can be found in all of the following except: ______.