Module 23: Professional and Legal Responsibilities
Liability under Common Law
An accountant may be liable under common law due to negligence or fraud.
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.
- 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
- Reckless disregard for the truth
- Lack of privity not valid as defense
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
Lack of privity is not a valid defense.