Transcript Business Law and the Regulation of Business Chapter 44

Business Law and the
Regulation of Business
Chapter 44: Accountant’s Legal Liability
By
Richard A. Mann
&
Barry S. Roberts
Topics Covered in this Chapter
A. Common Law
B. Federal Securities Law
Common Law
Contract Liability - the employment
contract between an accountant and her
client is subject to the general principles
of contract law.
 Explicit Duties - the accountant is
bound to perform all the duties she
expressly agrees to provide.
 Implicit Duties - the accountant
impliedly agrees to perform the contract
in a competent and professional
manner.

Contract Liability
Beneficiaries - contract liability extends
to the client/contracting party and to
third-party beneficiaries (noncontracting
parties intended by the contracting
parties to receive the primary benefit
under the contract).
 Breach of Contract - general contract
law principles apply.

Tort Liability


A tort is a private or civil wrong or injury
other than a breach of contract.
Negligence - an accountant is liable for
failing to exercise the degree of care a
reasonably competent accountant would
exercise under the circumstances; most
courts have extended an accountant's
liability for negligence beyond the client
and third-party beneficiaries to foreseen
third parties.
Accounts’ Liability to Third Parties for
Negligent Misrepresentation
Reasonably Foreseeable Plaintiffs
Foreseen Users
Privity
(Primary Benefit Test)
Third parties intended by the account and
client to receive primary benefit under contract
Those who the accountant knew would use the
work or those who use the work for a purpose
known to the accountant
Third parties who reasonably and foreseeably rely
Tort Liability

Fraud - an accountant who commits a
fraudulent act is liable for both
compensatory and punitive damages to
any person who he should have
reasonably foreseen would be injured; a
fraudulent act is a false representation
of fact that is material, is made with
knowledge of its falsity and with the
intention to deceive, and is justifiably
relied on.
Criminal Liability

State law imposes criminal liability on
accountants for willfully certifying false
documents, altering or tampering with
accounting records, using false financial
reports, giving false testimony, and
committing forgery.
Client Information


Working Papers - an accountant is
considered the owner of his working papers
but may not disclose their contents unless
the client agrees or a court orders the
disclosure.
Accountant–Client Privilege - not
recognized generally by the common law or
Federal law, although some States have
adopted statutes granting some form of
privilege; accountants authorized to practice
before the IRS have privilege for tax advice
given their client-taxpayers with respect to
Internal Revenue Code matters.
Federal Securities Law 1933 Act

Civil Liability - Section 11 imposes express
civil liability upon accountants if the financial
statements they prepare or certify for a
registration statement contain any untrue
statement or omit any material fact, unless
the accountant proves her due diligence
defense, which requires that the accountant
had, after reasonable investigation,
reasonable grounds to believe and did
believe that the financial statements were
true, complete, and accurate.
Federal Securities Law 1933 Act

Criminal Liability - a willful violator of
Section 11 is subject to fines of not
more than $10,000 and/or imprisonment
of not more than five years.
1934 Act


Section 18 - imposes express civil liability on
an accountant who knowingly makes any
false or misleading statement about any
material fact in any report, document, or
registration filed with the SEC.
Rule 10b–5 - an accountant is civilly liable
under this rule if he acts with scienter in
making oral or written misstatements or
omissions of material fact in connection with
the purchase or sale of a security.
1934 Act


Criminal Liability - a willful violator of either
Section 18 or Rule 10b–5 is subject to fines
of not more than $1 million and/or
imprisonment of not more than ten years.
Audit Requirements - auditors must
establish procedures capable of detecting
material illegal acts, identifying material
related party transactions, and evaluating
whether there is a substantial doubt about
the issuer's ability to continue as a going
concern during the next fiscal year.
Accountants’ Liability under Federal
Securities Law
Section 11 1933 Act
Section 18 1934 Act
Rule 10b-5 1934 Act
Conduct
Registration statement
containing material
misstatement or omission
False or misleading
statements in a document
filed with SEC
Deception or material
misstatement or omission
Fault
Negligence
Knowledge or bad faith
Scienter
Plaintiff’s knowledge is a
defense
Yes
Yes
Yes
Reliance required
No
Yes
Yes
Privity required
No
No
No