Deck 46: Accountants Liability and Malpractice

Question 1

Disclaimers of liability are not valid, even when it is reasonable to expect the accountant to stand behind her data.

Answer 1

False

Question 2

The standards for malpractice are the same for accountants who are full-time employees, as well as independent outside auditors.

Answer 2

True

Question 3

The contact rule does not require that the accountant to actually meet or communicate with the third party to establish a relationship equivalent to privity.

Answer 3

False

Question 4

In an action for breach of contract, the statute of limitations runs from the date on which the contract is breached.

Question 5

A disclaimer that protects an accountant from liability for inaccurate reporting of certain specified financial information will be held valid if the accountant had no means of examining the information.

Question 6

A client may only recover tort damages from an accountant for ordinary negligence.

Question 7

Following GAAP and GAAS is persuasive but not conclusive evidence of meeting standards for the accounting profession.

Question 8

Under the known-user rule the identity of the particular user must be known to hold the accountant liable for malpractice.

Question 9

An accountant who fails to render services in accordance with those in his profession, breaches his duty of care and commits malpractice.

Question 10

An accountant may be liable for malpractice if the accountant fails to detect signs that an employee of the client is embezzling.

Question 11

New York follows the contact rule in determining when third persons can sue accountants for negligence.

Question 12

The privity rule prevents the filing of an accounting malpractice lawsuit by a third party against an accountant.

Question 13

Breach of contract remedies are available to third parties against accountants because they are ordinarily considered third-party beneficiaries of contracts with accountants.

Question 14

In some states an exculpatory clause protects the accountant from a malpractice suit brought by a third party but not from a suit brought by a client.

Question 15

An accountant is generally not liable for damages if the accountant fails to inform a client of the tax consequences associated with selling a business.

Question 16

When the privity rule is applied, a bank lending money to the client of an accountant cannot sue the accountant for malpractice.

Question 17

An accountant cannot be held liable for turning a blind eye to suspicious issues and items.

Question 18

Disclaimers are not enforceable unless they are clear and unambiguous.

Question 19

A disclaimer based on lack of knowledge protects an accountant from malpractice liability.

Question 20

In some states, exculpatory clauses cannot protect the accountant from a suit brought by a third party.

Question 21

Misrepresentation: ______.

A) is the same as fraud.
B) is a false statement of fact made with the intent to deceive.
C) is a false statement of fact made without any intent to deceive.
D) can be used as a limitation to excuse an accountant from liability.

Question 22

An exculpatory clause most likely would be held to limit or disclaim liability for malpractice: ______.

A) in an action based on fraud.
B) in a suit brought by a third person.
C) when the accountant can reasonably be expected to stand behind the information in question.
D) when the clause is conspicuous, unambiguous, and clear.

Question 23

Under the known user rule: ______.

A) the accountant is not liable to any third parties who experience a loss as a result of the accountant's negligence.
B) the accountant is liable to all third parties who experience a loss as a result of the accountant's negligence.
C) the accountant is liable to third parties who experience a loss as a result of the accountant's negligence but only if the accountant knew the third party would be using the work product.
D) the accountant is liable to third parties who experience a loss as a result of the accountant's negligence but only if the accountant's client gave the work to the third party.

Question 24

The statute of limitations in a breach of contract action for malpractice runs from: ______.

A) the date when the contract is breached.
B) the date when the harm is discovered.
C) the date when the plaintiff determines the total amount of damages caused by the harm.
D) either the date when the harm occurs or when it is discovered, depending on the type of damages sustained.

Question 25

In contrast to contributory negligence principles, comparative negligence principles are never applied to malpractice situations.

Question 26

Courts generally impose liability on the accountant when a total stranger gets possession of the accountant's work and then sustains a loss because of a false statement in the work.

Question 27

Third persons are prohibited from recovering from an accountant who commits fraud.

Question 28

The known user rule imposes liability on the accountant for malpractice when he can foresee the parties who will rely on his work in the financial statements.

Question 29

One of the concerns reflected in Sarbanes-Oxley was that auditors were not exercising sufficient discretion and independence in conducting audits of their clients.

Question 30

According to the intended user rule the accountant must have furnished the information directly to the client, knowing that the client would transmit the information to other third parties.

Question 31

The contributory negligence of the client does not reduce the liability of an accountant who is liable for malpractice.

Question 32

The contact rule applies in which of the following states?

A) Alabama
B) Indiana
C) New York
D) Texas

Question 33

For accountants, fraudulent malpractice always involves upgrading the financial condition of the firm.

Question 34

In states that follow ______, a third party can recover from a negligent accountant if there was an agreement between the third party and the accountant.

A) the flexible rule
B) the intended user rule
C) the foreseeable user rule
D) the contract rule

Question 35

A person not in privity with an accountant is prohibited from recovering for malpractice when the accountant had no knowledge of any use that could affect that party.

Question 36

The standards for accountants' professional liability can be found in all of the following except: ______.

A) court decisions.
B) the actual contract.
C) GAAP and GAAS standards.
D) the common law.

Question 37

Professionals who fail to exercise normal care and skill in the performance of a contract for their services may be sued for a special type of breach known as: ______.

A) sub par performance.
B) illegal practice.
C) malpractice.
D) competence reservation.

Question 38

Under the flexible rule some courts have rejected the requirement of privity for malpractice and approach each situation on a case-by-case basis.

Question 39

An accountant may be able to raise the defense of the ______ in a malpractice suit by a third party.

A) contract rule.
B) lack of privity.
C) known user rule.
D) foreseeable user rule.

Question 40

An accountant guilty of malpractice can be sued: ______.

A) for breach of contract only.
B) for negligence only.
C) for breach of contract or for tort liability.
D) in federal court only if the suit is brought by a third person.

Question 41

Horseco, a new business, purchased ten thoroughbred horses for racing and breeding purposes. It hired John, an accountant, to prepare financial projections of anticipated future earnings for the first five (5) years of the new business. The information provided to John as the basis for the projections included assumptions made by Horseco about anticipated earnings from racing and breeding. The assumptions were based on Horseco's experience and were not based on objective standards that could be examined by John. John included with the projections a disclaimer that stated that the income projections were based on assumptions provided by Horseco and that John assumed no personal responsibility for the accuracy of those projections. Subsequently, the Larson Company purchased a fifty (50) percent interest in Horseco, and when Horseco's income did not match the projections, Larson sued John for accounting malpractice. How will the court decide?

Question 42

Sara and Sally rely on the statements of Alice, an accountant. In a lawsuit brought by Sara and Sally against Alice for fraud, Alice seeks to avoid liability based on the fact that neither Sara nor Sally was in privity of contract with Alice. Alice knew Sara might rely on the financial information provided, but Alice did not know of Sally or anyone in her position. Can Sara and Sally recover against Alice?

Question 43

Unidentified members of a certain class may sue for negligent malpractice in states that follow the __________ rule.

A) contact
B) known user.
C) unidentified user
D) foreseeable user

Question 44

To help eliminate conflicts of interest, Sarbanes-Oxley prohibits all the following activities by audit firms for their clients, except: ______.

A) the design and implementation of financial information systems.
B) actuarial services.
C) management functions and human resources.
D) having multiple clients whose interests may be adverse to each other.

Question 45

Herman hires Juanita as his accountant. Juanita commits negligence in preparing financial statements for a business Herman owns. Several investors rely on the financial statements and purchase shares of stock in the business. In a state that has adopted the privity rule, what result?

Question 46

An accountant who is being sued by a third person for malpractice based on fraud will be able to avoid liability if the accountant can show:

A) contributory negligence on the part of the plaintiff.
B) that an exculpatory clause applies.
C) that the plaintiff did not rely on the false statement.
D) the absence of privity of contract.

Question 47

When an accountant negligently prepares a financial statement knowing that the client intends to use it in obtaining a loan from a bank, the accountant will be liable to whichever lender actually makes the loan under the __________rule.

A) known user
B) contact
C) foreseeable user.
D) privity

Question 48

To ensure that audit partners do not become entrenched, Sarbanes-Oxley requires audit firms to change audit partners at least once every __________ years.

A) three (3)
B) five (5)
C) seven (7)
D) ten (10)

Question 49

Sarbanes-Oxley would prohibit which of the following individuals from serving on an audit committee of the company's board?

A) a director who accepts consulting fees from the company
B) a director who is affiliated with the company
C) a director who is affiliated with a subsidiary of the company.
D) all of these.

Question 50

The Public Company Oversight Board:

A) is a governmental body.
B) must have at least three board members that are CPAs.
C) enforces professional rules that ensure audit quality and auditor independence.
D) is an agency within the IRS.

Question 51

__________ impose liability on the accountant to a total stranger who gets possession of the accountant's work and then sustains a loss because of a false statement in the work.

A) No courts
B) A minority of courts
C) A majority of courts
D) All courts

Question 52

Some states have rejected the requirement of privity but not adopted any set rule. Instead, these states function under the __________ rule.

A) known user
B) contact
C) flexible
D) foreseeable user

Question 53

Under the ______ Act, auditors are to report any fraud at the company to management and the audit committee, and may be eligible for ______.

A) SOX, whistleblower awards.
B) SOX, tort awards.
C) Dodd-Frank, civil forfeiture awards.
D) Dodd-Frank, whistleblower awards.