LECTURE NOTES

Chapter 43. Liability of Accountants

Chapter Objectives
Define an audit and describe the different types of auditor's opinions.
Describe an accountant's liability to his or her client for breach of contract and fraud.
Define accountant malpractice.
Describe an accountant's liability to third parties under the Ultramares doctrine.
Describe an accountant's liability to third parties under the Restatement (Second) of Torts and foreseeability standard.
Describe an accountant's civil liability under federal securities laws.
Describe an accountant's criminal liability under federal securities laws and other laws.
Identify when the accountant-client privilege applies.
Define accountants' work papers.
Identify the liability of other professionals.

Audits and auditor's opinions
An audit is the verification of a company's books and records pursuant to federal securities laws, state laws, and stock exchange rules that must be performed by an independent CPA. Generally, accountants must use generally accepted accounting principles (GAAPs) and generally accepted auditing standards (GAASs).

Accountant's liability to his or her client for breach of contract and fraud
Under common law, accountants may be found liable to clients who hire them under several legal theories, including contract, fraud, and negligence.

Accountant malpractice
Accountant malpractice occurs when the accountant beaches the duty of reasonable care, knowledge, skill, and judgment that he or she owes to a client when providing auditing and other accounting services to the client.

Ultramares doctrine
Under the Ultramares doctrine, an accountant is liable only for negligence to third parties who are in privity of contract (the state of two specified parties being in a contract) or privity-like relationships with the accountant. This doctrine provides the narrowest standard for holding accountants liable to third parties for negligence.

Accountant's liability to third parties
Under Section 552 of the Restatement (Second) of Torts, an accountant is liable only for negligence to third parties who are members of a limited class of intended users of the client's financial statements. This provides a broader standard for holding accountants liable to third parties for negligence than the Ultramares doctrine.

Foreseeability standard
Under the foreseeability standard, an accountant is liable for negligence to third parties who are foreseeable users of the client's financial statements. This provides the broadest standard for holding accountants liable to third parties for negligence.

Accountant's civil liability
Accountants can be liable for violating various federal and state statutes, the most important of which is federal securities laws.

Accountant's criminal liability
Accountants can be criminally liable for violating certain federal and state securities laws and for other law violations.

Accountant/client privilege
Accountant/client privilege says that an accountant cannot be called as a witness against a client in a court action in that state. About 20 states have enacted laws to that effect. Federal courts do not recognize the privilege.

Accountant's work papers
Some states have enacted statutes that say an accountant's work papers cannot be used in a court action in that state. Federal courts do not recognize this statute.

Terms

Internet Links
Enron: www.insworld.com/web/broker/assurex_global/archive/cmar02.html
AccountingMalpractice.com: www.accountingmalpractice.com/
American Accounting Association: www.accounting.rutgers.edu/raw/aaa/