Wiley CPAexcel Exam Review 2014 Focus Notes: Regulation

Module 23: Professional and Legal Responsibilities

ACCOUNTANTS' LIABILITY

Liability under Common Law

An accountant may be liable under common law due to negligence or fraud.

Negligence

A loss due to negligence occurs when an accountant violates the duty to perform professional services in a competent manner. NEGligence may consist of

• Nondisclosure of information to a client
• Errors previously discovered not being corrected
• GAAP not being followed

Best defense to common law negligence is that appropriate professional standards were followed.

Simple negligence

• Careless mistakes
• Defense of lack of privity may be available
  • But client and intended third-party beneficiaries have privity
  • Foreseen third parties have privity in majority of states under tort law
  • Foreseen third parties lack privity in states conforming to Ultramares case

Gross negligence

• Reckless disregard for the truth
• Lack of privity not valid as defense

Fraud

Fraud refers to conduct that involves all of the following:

• Material false representation of fact
• Justifiable reliance on the information
• Awareness of the false information by the accountant
• The falsity was made with the ultimate intent to deceive
• The party must have suffered damages

Scienter refers to the accountant's knowledge of a false representation or material omission of fact with the intent to deceive.

Potential defenses against fraud include

• Lack of intent to deceive
• Immateriality

Lack of privity is not a valid defense.

Liability under Federal ...