Deck 33: Liability of Accountants and Other Professionals

Question 1

Traditionally, a professional owed a duty only to those with whom the professional had a direct contractual relationship.

Answer 1

True

Question 2

Negligence cases against professionals often focus on the standard of care exercised by the professional.

Answer 2

True

Question 3

An accountant who performs an audit may be liable for failing to detect misconduct if a normal audit would have revealed it.

Answer 3

True

Question 4

In all cases involving allegations of negligence, the plaintiff must prove that the professional's breach of the duty of care actually caused some injury.

Question 5

Professionals are required to adhere to certain standards of performance within their profession.

Question 6

An accountant normally will notbe held liable to the client for incorrect judgment.

Question 7

In an opinion, an auditor can include a general statement disclaiming any liability for false or misleading financial statements.

Question 8

Generally, an accountant must exercise the degree of care that an ordinarily prudent accountant would exercise.

Question 9

Accountants and other professionals do not face liability under the common law for any breach of contract.

Question 10

Professionals are governed by the contracts they enter into with their clients.

Question 11

Professionals are required to deliver services but the competency of the services is never an issue.

Question 12

Under rules of professional conduct, a lawyer should not engage in conduct involving "dishonesty."​

Question 13

Attorneys are required to find relevant law that is applicable to a case and can be discovered through a reasonable amount of research.

Question 14

Under rules of professional conduct, committing a criminal act that reflects adversely on a person's "honesty" is professional misconduct.

Question 15

To obtain damages for fraud, an innocent party does notneed to have been injured.

Question 16

An accountant is not required to discover every impropriety, defalcation, and fraud in a client's books.

Question 17

Constructive fraud may be found when an accountant is grossly negligent in performing his or her duties.

Question 18

A professional can be liable for constructive fraud only if he or she acted with fraudulent intent.

Question 19

In some states, in the absence of privity, a party cannot recover from an accountant for negligence.

Question 20

In most courts, accountants are subject to liability for negligence only to their clients.

Question 21

Generally, an attorney is not liable to a nonclient unless the attorney has committed fraud or malicious conduct.

Question 22

Fact Pattern 33-1
​Nelson, an accountant, enters into a contract to provide services to Operational Processes, Inc. (OPI). Nelson does not finish the work within the contract's deadline. This causes OPI to fail to meet certain other deadlines owed to Prime Bank, which results in the firm's payment of penalties to the bank.
Refer to Fact Pattern 33–1. Nelson is

A)liable for breach of contract.
B)not liable, because Nelson is a professional.
C)not liable, because Nelson's failure must have been OPI's fault.
D)not liable, because the work took longer than foreseen.

Question 23

For a plaintiff to recover damages from an accountant under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, ordinary negligence is notenough.

Question 24

Penalties for aiding or assisting in the preparation of false tax returns are limited to one penalty per taxpayer per tax year.

Question 25

In all states, communications between an accountant and his or her client are privileged.

Question 26

An accountant is not liable for a false statement that affects the price of a security if the buyer or seller of the security knew the statement was false.

Question 27

Odette, an accountant, contracts to perform services for Percy. Odette acts in good faith and conforms to generally accepted accounting principles, but makes an incorrect judgment. Odette is most likely

A)liable if Odette failed to discover a defalcation.
B)liable if Odette failed to discover a fraud.
C)liable if Odette failed to discover an impropriety.
D)not liable.

Question 28

Working papers are the documents through which a court orders an accountant to audit a public company.

Question 29

For a plaintiff to recover damages under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, proof of intent is necessary.

Question 30

A failure to follow generally accepted accounting principles and generally accepted auditing standards is proof of a lack of due diligence.

Question 31

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

A)liable if a normal audit would have revealed the misconduct.
B)liable if Ricardo issues a specifically qualified opinion.
C)not liable if Ricardo generally disclaims any liability.
D)not liable if the misconduct was due to Sensei Sushi's negligence.

Question 32

An accountant is not liable for an omission in a registration statement to a purchaser of securities if the omission had no causal connection to the purchaser's loss.

Question 33

Under the Sarbanes-Oxley Act, accountants must surrender possession of working papers relating to an audit or review to the party for whom the work was performed.

Question 34

Kiana can be described as "a reasonably competent general practitioner of ordinary skill, experience, and capacity." This is the normal standard for judging the performance of

A)any individual.
B)an accountant.
C)an attorney.
D)a tax preparer.

Question 35

An accountant may be liable for a misstatement or omission of material fact in a registration statement.

Question 36

An accountant is always liable for a misleading statement that affects the price of a security, even if the accountant acted in good faith.

Question 37

Under the Sarbanes-Oxley Act, accountants need not retain working papers relating to an audit or review.

Question 38

The Sarbanes-Oxley Act applies only to domestic public accounting firms that provide auditing services to "issuers."​

Question 39

An accountant's liability under the Securities Act of 1933 requires privity of contract with the purchaser of a security.

Question 40

Fact Pattern 33-1
​Nelson, an accountant, enters into a contract to provide services to Operational Processes, Inc. (OPI). Nelson does not finish the work within the contract's deadline. This causes OPI to fail to meet certain other deadlines owed to Prime Bank, which results in the firm's payment of penalties to the bank.
Refer to Fact Pattern 33-1.OPI may be entitled to​

A) ​payment from Nelson of the amount of the penalties in damages.
B) ​specific performance of any future contract with Nelson.
C) ​an injunction against future breaches of contract by Nelson.
D) ​no damages or other relief because Nelson is not liable.

Question 41

Copper Piping Company's liabilities exceed its assets, but its books falsely reflect a positive net worth. Copper hires Dart & Dash, an accounting firm, to prepare a balance sheet, which is certified to show a net worth. Equity Bank relies on the balance sheet to make a loan to Copper. Copper defaults on the loan. Under the Ultramares rule, Dart & Dash is most likely not liable because the firm​

A) ​did not owe a duty of care to any third party.
B) ​is not responsible Copper's false books.
C) ​finished its work before Copper's loan and default.
D) ​was not in privity with Equity.

Question 42

Root & Branch is a Registered Public Accounting Firm. Root & Branch performs auditing services for Sales & Service Company. Under the Sarbanes-Oxley Act, at the same time, for the same company, Root & Branch can also perform​

A) ​bookkeeping.
B) ​none of the choices.
C) ​appraisal services.
D) ​financial systems design.

Question 43

Tyson accuses Ulman, an attorney, of committing malpractice. Malpractice is​

A) ​constructive fraud.
B) ​a defalcation.
C) ​none of the choices.
D) ​professional negligence.

Question 44

Hadley, an accountant, accumulates working papers while performing an audit for Ilene. After the audit, these documents belong to​

A) Hadley, with Ilene having a right of access to the papers.
B) ​Ilene, with Hadley having a right of access to the papers.
C) neither Hadley nor Ilene-the papers must be disposed of.
D) ​the Public Company Accounting Oversight Board.

Question 45

Nguyen Imports, Inc., accuses Ogilvie, an accountant, of committing defalcation. This is​

A) ​embezzlement.
B) ​general misconduct.
C) ​professional negligence.
D) ​misrepresentation of professional expertise.

Question 46

Farley, an accountant, intentionally misstates a material fact to mislead Global Industries, Inc., a client. Global justifiably relies on the misstatement to its detriment. Farley is most likely liable for​

A) ​fraud.
B) ​malpractice.
C) ​negligence.
D) ​none of the choices.

Question 47

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

A) ​any third party.
B) ​no third party with whom the accountant is not in privity or "near privity."
C) ​third parties who are foreseen users of the work.
D) ​third parties who are reasonably foreseeable users of the work.

Question 48

Brenda is an attorney whose clients include Capital Finance Company. If Brenda is negligent in her work for Capital, under the Restatement (Third) of Torts, Brenda may be liable to Capital and​

A) ​any third party.
B) ​no third party.
C) ​third parties who are foreseen users of the work.
D) ​third parties who are reasonably foreseeable users of the work.

Question 49

Gift Basket Company's liabilities exceed its assets. Gift Basket hires Hill & Dale, an accounting firm, to prepare a balance sheet. Through Hill & Dale's negligent omissions, the sheet shows a net worth. Investment Bank relies on the balance sheet to make a loan to Gift Basket. When Gift Basket defaults, the bank files a suit against Hill & Dale. Under the Restatement (Third) of Torts, Hill & Dale is most likely​

A) ​liable because Hill & Dale owed a duty of care to Gift Basket.
B) ​liable because Hill & Dale owed a duty to any foreseeable user.
C) ​liable if Hill & Dale knew that the bank would rely on the balance sheet.
D) ​not liable because Hill & Dale and the bank were not in privity.

Question 50

April is an accountant whose clients include Bistro Restaurants Inc. If April is negligent in her work for Bistro, most courts would hold her liable to Bistro and​

A) ​any third party.
B) ​no third party with whom the accountant is not in privity or "near privity."
C) ​third parties who are foreseen users of the work.
D) third parties who are reasonably foreseeable users of the work.

Question 51

Taylor is an accountant whose clients include Universal Metrics Corporation. Velma is Taylor's attorney. Working papers that Taylor develops when preparing financial reports for Universal Metrics are owned by​

A) Taylor.
B) ​Universal Metrics.
C) ​Velma.
D) ​no one-the papers must be destroyed immediately after use.

Question 52

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​

A) ​actual fraud.
B) ​constructive fraud.
C) ​destructive fraud.
D) ​virtual fraud.

Question 53

Commerce Bank files a suit against Drake, its former accountant, alleging constructive fraud. Drake may be held liable​

A) ​if Commerce Bank cannot prove actual fraud.
B) ​if Drake was grossly negligent in the performance of his duties.
C) ​only if Drake acted with fraudulent intent.
D) ​only if Drake impersonated someone who could be liable for fraud.

Question 54

Dougal, an accountant, prepares for Econo Enterprise, Inc., a financial statement that omits a material fact. The statement is included in Econo's registration statement with the Securities and Exchange Commission. Felicia, who relies the statement, and Graham, who does not, each buy Econo stock. Under Section 11 of the Securities Act of 1933, Dougal may be liable to​

A) ​no one.
B) ​Felicia only.
C) ​Felicia and Graham.
D) ​Graham only.

Question 55

Lauren is an attorney. Like the conduct of all attorneys, Lauren's conduct is governed by rules of professional conduct established by the state in which she is licensed, and the Model Rules of Professional Conduct of​

A) ​the Securities and Exchange Commission.
B) ​the American Bar Association.
C) ​the American Institute of Certified Public Accountants.
D) ​the International Accounting Standards Board.

Question 56

Delaney is an accountant charged with negligence by Estimation & Valuation Services Inc., a client. Delaney may successfully defend against the claim if he can show that​

A) ​scienter was lacking.
B) ​he complied with all International Financial Reporting Standards.
C) ​the negligence was not the proximate cause of the client's losses.
D) ​the negligence was only contributory.

Question 57

Edward, an attorney, allows a statute of limitations to lapse on a claim by Fabrication Company, a client. Edward​

A) ​can be held liable for malpractice.
B) ​has violated an ethical standard but cannot be held liable.
C) ​is subject to criminal penalties under the statute of limitations.
D) ​will be automatically disbarred.

Question 58

Rollo is an accountant whose clients include Systems Analysis Corporation. Tyra is Rollo's attorney. Under the common law and by statute in many states, working papers that Rollo develops when preparing financial reports for Systems Analysis are owned by​

A) ​Rollo.
B) ​Systems Analysis.
C) ​Tyra.
D) ​no one-the papers must be destroyed immediately after use.

Question 59

Norman is an accountant. Norman's violation of generally accepted accounting principles and generally accepted auditing standards​

A) ​does not indicate that Norman was negligent.
B) ​is prima facie evidence that Norman was negligent.
C) ​precludes Norman from raising any defense against a negligence claim.
D) is embarrassing but will never subject Norman to liability.

Question 60

Digital Systems Corporation files a suit against Ethan, its former accountant, alleging constructive fraud. Digital Systems need not prove​​

A) ​misstatement of a material fact.
B) ​intent to deceive.
C) ​justifiable reliance.
D) ​an injury.

Question 61

Miriam is an accountant. Natalie is an attorney. Which professional is most restricted from disclosing her or his client's communication?​

Question 62

Geoff is an attorney, whose clients include Hydroponic Superstores, Inc. Unless Hydroponic has violated securities law, the contents of Geoff's file on Hydroponic may be disclosed to someone other than the firm​

A) ​under no circumstances.
B) ​only under a court order (with or without Hydroponic's consent).
C) ​only with Hydroponic's consent.
D) ​under any circumstances.

Question 63

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​

A) ​only the purchase and sale of a security.
B) ​fraud, reliance, materiality, and lack of knowledge about securities.
C) ​fraud, reliance, materiality, and incompetence.
D) ​fraud, reliance, materiality, causation, and scienter.

Question 64

Beck is an accountant who prepares her clients' tax returns. Cole is not an accountant, but he also prepares tax returns for clients. Under the Internal Revenue Code, liability for preparing a false return may be imposed on​

A) Beck and Cole.
B) ​Beck only.
C) ​Cole only.
D) ​none of the choices.

Question 65

Reliant Funds, Inc., files a suit against Saul, an accountant, under the antifraud provisions of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. To succeed, Reliant Funds must show that Saul​

A) ​acted with scienter.
B) ​bought or sold a security.
C) ​is incompetent.
D) ​knows nothing about securities.

Question 66

Randi, an accountant, includes a false statement in a report for Social Media Marketing, Inc., that is filed with the Securities and Exchange Commission. When Theo buys stock in Social Media and loses money on the investment, he files a suit against Randi, alleging fraud under the 1934 Securities Exchange Act. To avoid liability, Randi can show that she​

A) ​intended to defraud Social Media, not Theo.
B) ​intended to profit on stock trades generally, not only Theo's.
C) ​is an otherwise competent accountant.
D) ​had no knowledge that her statement was false.

Question 67

Silvia prepares federal corporate income tax returns for Trade & Pawn Stores, Inc., and other firms. Under the Internal Revenue Code, with respect to an understatement of a client's tax liability, Silvia may be liable for​

A) ​negligent or willful misconduct.
B) ​none of the choices.
C) ​only negligent misconduct.
D) ​only willful misconduct.

Question 68

Diderot's accountant is Esteban and his attorney is Figaro. All states protect, as privileged information, Diderot's communications with​

A) ​Esteban and Figaro.
B) Esteban only.
C) ​Figaro only.
D) ​none of the choices.

Question 69

Hernando, an accountant, helps Industrial Equipment & Supplies Company prepare and file a false federal corporate income tax return. Under the Internal Revenue Code, this is​

A) ​a felony punishable by a fine and imprisonment.
B) ​no violation.
C) ​a misdemeanor punishable only by a fine.
D) ​a civil violation subject to a liability suit but not a crime.

Question 70

Finola, a certified public accountant, provides accounting services to Global Trade Corporation. The services include preparing Global Trade's financial reports 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 letters indicate this situation. Relying on Finola's portrayal of Global Trade's financial situation, the firm borrows a large sum of money to build a new shipping 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 engage in intentional fraud but was negligent, what is her potential liability?​

Question 71

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​

A) ​negligent or willful misconduct.
B) no misconduct.
C) ​only negligent misconduct.
D) ​only willful misconduct.

Question 72

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​ ​

A) relied on the omission.
B) ​suffered a loss on the stock.
C) ​knew about the omission before making her purchase.
D) ​is a sophisticated investor.