Chat with AIExam 47: Professional Liability and Accountability
Reed prepares federal corporate income tax returns for Shopping Malls, Inc., and other firms. Under the Internal Revenue Code, with respect to an understatement of a client's tax liability, Reed may be liable for
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Finola, a certified public accountant, provides accounting serv?ices to Global Trade Corporation. The services include preparing Global Trade's financial re?ports and issuing opinion letters based on the reports. In 2014, Global Trade falls into serious financial trouble, but neither Finola's reports nor her opinion let?ters indicate this situation. Relying on Finola's portrayal of Global Trade's finan?cial situation, the firm borrows a large sum of money to build a new ship?ping facility. In lending Global Trade the money, Harbor City Bank relies on Finola's opinion letter. Finola is aware of this reliance. If Finola did not en?gage in intentional fraud but was negligent, what is her potential liability?
(24) VerifiedRegarding the accountant's potential liability to the bank, most courts would hold her liable for negligence, but the standard for im?posing this liability varies.
There are three different views. The tradi?tional rule (the Ultramares rule) states that accountants owe a duty of care only to those persons for whose primary benefit the accountant pre?pares reports or issues opinion letters. In the absence of privity, a party could not recover from an accoun?tant. Under that rule, the accountant in this problem would not be held liable to the bank.
Under a slight modification of this rule, some courts hold that if a third party has a suf?ficiently close relationship or nexus (link or connection) with an ac?count?ant, then the privity requirement may be satisfied without estab?lishing an accountant-client relation?ship. Under this modification, the accountant would be held liable because he knew that the bank relied on her letter.
The majority of courts have adopted the position taken by Section 552 of the Restatement (Second) of Torts, under which an ac?countant's liability ex?tends to persons for whose benefit the accountant "intends to supply the information or knows that the re?cipient intends to supply it" and to those persons whom the accountant "intends the in?formation to influence or knows that the recipient so intends." Under this rule, the ac?countant will be held liable to the bank for negligent misstatements or omissions, be?cause he knew that the bank was relying on her work product when de?cid?ing whether to make the loan.
A few other courts hold accountants li?able to any users whose reliance on an ac?countant's statements or reports is reasonably foreseeable. Of course, under this stan?dard the accountant in the hypothetical would clearly be held liable.
Diderot's accountant is Esteban and his attorney is Figaro. All states protect, as privileged information, Diderot's communications with
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Negligence cases against professionals usually focus on the element of causation.
(27) Edward, an attorney, allows a statute of limitations to lapse on a claim by Fabrication Company, a client. Edward
(26) An accountant's liability under the Securities Act of 1933 re?quires privity of contract with the purchaser of a security.
(37) Root & Branch is a Registered Public Accounting Firm. Root & Branch performs auditing services for Sales & Service Company. Under the Sarbanes-Oxley Act of 2002, at the same time, for the same company, Root & Branch can also provide
(35) Attorneys are required to find relevant law that is applicable to a case and can be discovered through a reasonable amount of research.
(33) Norman is an accountant. Norman's violation of generally accepted accounting principles and generally accepted auditing standards
(37) Ricardo, an accountant, contracts to conduct an audit for Sensei Sushi Restaurants. In performing the audit, Ricardo fails to detect certain misconduct. Ricardo is most likely
(37) Delaney is an accountant charged with negli?gence by Estimation & Valuation Services Inc., a client. Delaney may successfully defend against the claim if he can show that
(31) Everett is an accountant whose clients include Finance & Capital, Inc. Under the Ultramares rule, if Everett is negligent in his work for Finance & Capital, he could be liable to Finance & Capital and
(31) Traditionally, a professional owed a duty only to those with whom the professional had a direct contractual relationship.
(39) Penalties for aiding or assisting in the preparation of false tax returns are limited to one penalty per taxpayer per tax year.
(37) Odell, an accountant, prepares for Pronto Tacos Corporation a financial statement that omits a material fact. The financial statement is included in Pronto Tacos's registration statement, which Qiana reads. Qiana buys Pronto Tacos stock. Under Section 11 of the Securities Act of 1933, for Odell to be liable for the omission, Qiana must show that she
(30) Under rules of professional misconduct, an attorney should not engage in conduct involving deceit.
(21) Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing, Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for
(29) Cathy is an accountant with Discount Retail Corporation. Efrem buys Discount Retail stock and loses money on the investment. To recover from Cathy under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, Efrem must prove
(35) A client's negligence is never a defense to a charge of negligence against an accountant.
(29) Commerce Bank files a suit against Drake, its former accountant, al?leging constructive fraud. Drake may be held liable
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