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.

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 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 ...

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