Deck 22: Professional Liability and Accountability

Question 1

An accountant is required to discover every impropriety, defalcation, and fraud in a client's books.

Answer 1

False

Question 2

Accountants and other professionals face liability under the common law for any breach of contract.

Answer 2

True

Question 3

In most courts, accountants are subject to liability for negligence only to their clients.

Answer 3

False

Question 4

Traditionally, a professional owed a duty to those with whom the professional had a direct contractual relationship to perform a service and to any third party who relied on that service.

Question 5

Attorneys are required to find relevant law that is applicable to a case and can be discovered through a reasonable amount of research.

Question 6

Damages payable to a client on a professional's breach of contract do not include any penalties the client had to pay as a result of the breach.

Question 7

Professionals are required to adhere to certain standards of performance within their profession.

Question 8

In all cases involving allegations of negligence, the plaintiff must prove that the professional's breach of the duty of care actually caused some injury.

Question 9

In performing professional services, an accountant is subject to the standard of the ordinarily prudent person.

Question 10

Negligence cases against professionals often focus on the standard of care exercised by the professional.

Question 11

An accountant who performs an audit may be liable for failing to detect misconduct if a normal audit would have revealed it.

Question 12

Under rules of professional conduct, a lawyer should not engage in conduct involving "dishonesty."​

Question 13

Under rules of professional conduct, state authorities can discipline professionals for misconduct.

Question 14

To obtain damages for fraud, an innocent party does not need to have been injured.

Question 15

The competency of professionals' service is never an issue.

Question 16

A professional can be liable for constructive fraud only if he or she acted with fraudulent intent.

Question 17

Professionals are governed by the contracts they enter into with their clients.

Question 18

In some states, in the absence of privity, a party cannot recover from an accountant for negligence.

Question 19

In an opinion, an auditor can include a general statement disclaiming any liability for false or misleading financial statements.

Question 20

A professional can not be held liable for constructive fraud.

Question 21

An accountant is not liable for a false statement that affects the price of a security if the buyer or seller of the security knew the statement was false.

Question 22

Fact Pattern 22-1
Nelson, an accountant, enters into a contract to provide services to Operational Processes, Inc. (OPI). Nelson does not finish the work within the contract's deadline. This causes OPI to fail to meet certain other deadlines owed to Prime Bank, which results in the firm's payment of penalties to the bank.
Refer to Fact Pattern 22-1.Nelson is​

A) ​liable for breach of contract.
B) ​not liable, because Nelson is a professional.
C) ​not liable, because Nelson's failure must have been OPI's fault.
D) ​not liable, because the work took longer than foreseen.

Question 23

An accountant is liable for a misleading statement that affects the price of a security, unless the accountant acted in good faith.

Question 24

Under federal law, communications between an accountant and his or her client are privileged.

Question 25

Odette, an accountant, contracts to perform services for Percy. Odette acts in good faith and conforms to generally accepted accounting principles, but makes an incorrect judgment. Odette is most likely​

A) ​liable if Odette failed to discover a defalcation.
B) ​liable if Odette failed to discover a fraud.
C) ​liable if Odette failed to discover an impropriety.
D) ​not liable.

Question 26

The Sarbanes-Oxley Act applies only to domestic public accounting firms that provide auditing services to "issuers."​

Question 27

For a plaintiff to recover damages from an accountant under Section 10(b) of the Securities Exchange Act of 1934, ordinary negligence is not enough.

Question 28

Ricardo, an accountant, contracts to conduct an audit for Sensei Sushi Restaurants. In performing the audit, Ricardo fails to detect certain misconduct. Ricardo is most likely​

A) ​liable if a normal audit would have revealed the misconduct.
B) ​liable if Ricardo issues a specifically qualified opinion.
C) ​not liable if Ricardo generally disclaims any liability.
D) ​not liable if the misconduct was due to Sensei Sushi's negligence.

Question 29

Accountants are exempt from the criminal provisions of federal tax laws.

Question 30

Working papers are the documents through which a court orders an accountant to audit a public company.

Question 31

Accountants must surrender possession of working papers relating to an audit or review to the party for whom the work was performed.

Question 32

Fact Pattern 22-1
Nelson, an accountant, enters into a contract to provide services to Operational Processes, Inc. (OPI). Nelson does not finish the work within the contract's deadline. This causes OPI to fail to meet certain other deadlines owed to Prime Bank, which results in the firm's payment of penalties to the bank.
Refer to Fact Pattern 22-1.OPI may be entitled to​

A) ​payment from Nelson of the amount of the penalties in damages.
B) ​specific performance of any future contract with Nelson.
C) ​an injunction against future breaches of contract by Nelson.
D) ​no damages or other relief because Nelson is not liable.

Question 33

An accountant's liability under the Securities Act of 1933 does I require privity of contract with the purchaser of a security.

Question 34

An accountant cannot be held liable for a misstatement or omission of material fact in a registration statement.

Question 35

An accountant is liable for an omission in a registration statement to a purchaser of securities whether or not the omission has a causal connection to the purchaser's loss.

Question 36

Generally, an attorney is not liable to a nonclient unless the attorney has committed fraud or malicious conduct.

Question 37

Under the Sarbanes-Oxley Act, working papers are the property of the client for whom an accountant performed a service.

Question 38

A failure to follow generally accepted accounting principles and generally accepted auditing standards is proof of a lack of due diligence.

Question 39

Penalties for aiding or assisting in the preparation of false tax returns are limited to one penalty per taxpayer per tax year.

Question 40

Kiana can be described as "a reasonably competent general practitioner of ordinary skill, experience, and capacity." This is the normal standard for judging the performance of​

A) ​any individual.
B) ​an accountant.
C) ​an attorney.
D) ​a tax preparer.

Question 41

Taylor is an accountant whose clients include Universal Metrics Corporation. Vera is Taylor's attorney. Working papers that Taylor develops when preparing financial reports for Universal Metrics are owned by​

A) ​Taylor.
B) ​Universal.
C) ​Vera.
D) ​no one-the papers must be destroyed immediately after use.

Question 42

Commerce Bank files a suit against Drake, its former accountant, alleging constructive fraud. Drake may be held liable​

A) ​if Commerce Bank cannot prove actual fraud.
B) ​if Drake was grossly negligent in the performance of his duties.
C) ​only if Drake acted with fraudulent intent.
D) ​only if Drake impersonated someone who could be liable for fraud.

Question 43

Brenda is an attorney whose clients include Capital Finance Company. If Brenda is negligent in her work for Capital, under the Restatement (Third) of Torts, Brenda may be liable to Capital and​

A) ​any third party.
B) ​no third party.
C) ​third parties who are foreseen users of the work.
D) ​third parties who are reasonably foreseeable users of the work.

Question 44

Hadley, an accountant, accumulates working papers while performing an audit for Ilene. After the audit, these documents belong to​

A) ​Hadley, with Ilene having a right of access to the papers.
B) ​Ilene, with Hadley having a right of access to the papers.
C) ​neither Hadley nor Ilene-the papers must be disposed of.
D) ​the Public Company Accounting Oversight Board.

Question 45

Digital Systems Corporation files a suit against Ethan, its former accountant, alleging constructive fraud. Digital Systems need not prove​

A) ​misstatement of a material fact.
B) ​intent to deceive.
C) ​justifiable reliance.
D) ​an injury.

Question 46

Farley, an accountant, intentionally misstates a material fact to mislead Global Industries, Inc., a client. Global justifiably relies on the misstatement to its detriment. Farley is most likely liable for​

A) ​fraud.
B) ​malpractice.
C) ​negligence.
D) ​none of the choices.

Question 47

Lauren is an attorney. Like the conduct of all attorneys, Lauren's conduct is governed by rules of professional conduct established by the state in which she is licensed, and the Model Rules of Professional Conduct of​

A) ​the Securities and Exchange Commission.
B) ​the American Bar Association.
C) ​the American Institute of Certified Public Accountants.
D) ​the International Accounting Standards Board.

Question 48

Nguyen Imports, Inc., accuses Ogilvie, an accountant, of committing defalcation. This is​

A) ​embezzlement.
B) ​general misconduct.
C) ​professional negligence.
D) ​misrepresentation of professional expertise.

Question 49

Root & Branch is a Registered Public Accounting Firm. Root & Branch performs auditing services for Sales & Service Company. Under the Sarbanes-Oxley Act, at the same time, for the same company, Root & Branch can also perform​

A) ​bookkeeping.
B) ​none of the choices.
C) ​appraisal services.
D) ​financial systems design.

Question 50

Delaney is an accountant charged with negligence by Estimation & Valuation Services Inc., a client. Delaney may successfully defend against the claim if he can show that​

A) ​scienter was lacking.
B) ​he complied with all International Financial Reporting Standards.
C) ​the negligence was not the proximate cause of the client's losses.
D) ​the negligence was only contributory.

Question 51

Norman is an accountant. Norman's violation of generally accepted accounting principles and generally accepted auditing standards​

A) ​does not indicate that Norman was negligent.
B) ​is prima facie evidence that Norman was negligent.
C) ​precludes Norman from raising any defense against a negligence claim.
D) ​is embarrassing but will never subject Norman to liability.

Question 52

Tyson accuses Ulman, an attorney, of committing malpractice. Malpractice is​

A) ​constructive fraud.
B) ​a defalcation.
C) ​none of the choices.
D) ​professional negligence.

Question 53

Gift Company's liabilities exceed its assets. Gift hires Hill & Dale, an accounting firm, to prepare a balance sheet. Through negligent omissions, the sheet shows a net worth. Invest Bank relies on it to make a loan to Gift. When the firm defaults, the bank files a suit against Hill & Dale. Under the Restatement (Third) of Torts, Hill & Dale is most likely​

A) ​liable because Hill & Dale owed a duty of care to Gift.
B) ​liable because Hill & Dale owed a duty to any foreseeable user.
C) ​liable if Hill & Dale knew that the bank would rely on the balance sheet.
D) ​not liable because Hill & Dale and the bank were not in privity.

Question 54

Lou, an attorney, allows a statute of limitations to lapse on a claim by Metal Fabrication Company, a client. Lou​

A) ​can be held liable for malpractice.
B) ​has violated an ethical standard but cannot be held liable.
C) ​is subject to criminal penalties under the statute of limitations.
D) ​will be automatically disbarred.

Question 55

Ailing Company's liabilities exceed its assets. Ailing hires Brad, an accountant, to certify a balance sheet showing a positive net worth. Credit Bank relies on the balance sheet to make a loan to Ailing. The firm defaults on the loan. Under the Ultramares rule, Brad is most likely not liable because he​

A) ​did not owe a duty of care to any third party.
B) ​is not responsible for his client's finances.
C) ​finished his work before Ailing's loan and default.
D) ​was not in privity with the bank.

Question 56

Everett is an accountant whose clients include Finance & Capital, Inc. Under the Ultramares rule, if Everett is negligent in his work for Finance & Capital, he could be liable to Finance & Capital and​

A) ​any third party.
B) ​no third party with whom the accountant is not in privity or "near privity."
C) ​third parties who are foreseen users of the work.
D) ​third parties who are reasonably foreseeable users of the work.

Question 57

Rollo is an accountant whose clients include Systems Analysis Corporation. Tyra is Rollo's attorney. Under the common law and by statute in many states, working papers that Rollo develops when preparing financial reports for Systems Analysis are owned by​

A) ​Rollo.
B) ​Systems Analysis.
C) ​Tyra.
D) ​no one-the papers must be destroyed immediately after use.

Question 58

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing, Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for​

A) ​actual fraud.
B) ​constructive fraud.
C) ​destructive fraud.
D) ​virtual fraud.

Question 59

Doug, an accountant, prepares for Econo Enterprise, Inc., a financial statement that omits a material fact. The statement is included in Econo's registration statement with the Securities and Exchange Commission. Felicia, who relies the statement, and Graham, who does not, each buy Econo stock. Under Section 11 of the Securities Act of 1933, Doug may be liable to​

A) ​no one.
B) ​Felicia only.
C) ​Felicia and Graham.
D) ​Graham only.

Question 60

April is an accountant whose clients include Bistro Restaurants Inc. If April is negligent in her work for Bistro, most courts would hold her liable to Bistro and​

A) ​any third party.
B) ​no third party with whom the accountant is not in privity or "near privity."
C) ​third parties who are foreseen users of the work.
D) ​third parties who are reasonably foreseeable users of the work.

Question 61

Cathy is an accountant with Discount Retail Corporation. Efrem buys Discount Retail stock and loses money on the investment. To recover from Cathy under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, Efrem must prove​

A) ​only the purchase and sale of a security.
B) ​fraud, reliance, materiality, and lack of knowledge about securities.
C) ​fraud, reliance, materiality, and incompetence.
D) ​fraud, reliance, materiality, causation, and scienter.

Question 62

Geoff is an attorney, whose clients include Hydroponic Superstores, Inc. Unless Hydroponic has violated securities law, the contents of Geoff's file on Hydroponic may be disclosed to someone other than the firm​

A) ​under no circumstances.
B) ​only under a court order (with or without Hydroponic's consent).
C) ​only with Hydroponic's consent.
D) ​under any circumstances.

Question 63

Diderot's accountant is Esteban and his attorney is Figaro. All states protect, as privileged information, Diderot's communications with​

A) ​Esteban and Figaro.
B) ​Esteban only.
C) ​Figaro only.
D) ​none of the choices.

Question 64

Hernando, an accountant, helps Industrial Equipment & Supplies Company prepare and file a false federal corporate income tax return. Under the Internal Revenue Code, this is​

A) ​a felony punishable by a fine and imprisonment.
B) ​no violation.
C) ​a misdemeanor punishable only by a fine.
D) ​a civil violation subject to a liability suit but not a crime.

Question 65

Odell, an accountant, prepares for Pronto Tacos Corporation a financial statement that omits a material fact. The financial statement is included in Pronto Tacos's registration statement, which Qiana reads. Qiana buys Pronto Tacos stock. Under Section 11 of the Securities Act of 1933, for Odell to be liable for the omission, Qiana must show that she​

A) ​relied on the omission.
B) ​suffered a loss on the stock.
C) ​knew about the omission before making her purchase.
D) ​is a sophisticated investor.

Question 66

Reed prepares federal corporate income tax returns for Shopping Malls, Inc., and other firms. Under the Internal Revenue Code, with respect to an understatement of a client's tax liability, Reed may be liable for​

A) ​negligent or willful misconduct.
B) ​no misconduct.
C) ​only negligent misconduct.
D) ​only willful misconduct.

Question 67

Randi, an accountant, includes a false statement in a report for Social Media Marketing, Inc., that is filed with the Securities and Exchange Commission. When Theo buys stock in Social Media and loses money on the investment, he files a suit against Randi, alleging fraud under the 1934 Securities Exchange Act. To avoid liability, Randi can show that she​

A) ​intended to defraud Social Media, not Theo.
B) ​intended to profit on stock trades generally, not only Theo's.
C) ​is an otherwise competent accountant.
D) ​had no knowledge that her statement was false.

Question 68

Miriam is an accountant. Natalie is an attorney. Which professional is most restricted from disclosing her or his client's communication?​

Question 69

Silvia prepares federal corporate income tax returns for Trade & Pawn Stores, Inc., and other firms. Under the Internal Revenue Code, with respect to an understatement of a client's tax liability, Silvia may be liable for​

A) ​negligent or willful misconduct.
B) ​none of the choices.
C) ​only negligent misconduct.
D) ​only willful misconduct.

Question 70

Finola, a certified public accountant, provides accounting services to Global Trade Corporation. The services include preparing Global Trade's financial reports and issuing opinion letters based on the reports. In 2014, Global Trade falls into serious financial trouble, but neither Finola's reports nor her opinion letters indicate this situation. Relying on Finola's portrayal of Global Trade's financial situation, the firm borrows a large sum of money to build a new shipping facility. In lending Global Trade the money, Harbor City Bank relies on Finola's opinion letter. Finola is aware of this reliance. If Finola did not engage in intentional fraud but was negligent, what is her potential liability?​

Question 71

Reliant Funds, Inc., files a suit against Saul, an accountant, under the antifraud provisions of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. To succeed, Reliant Funds must show that Saul​

A) ​acted with scienter.
B) ​bought or sold a security.
C) ​is incompetent.
D) ​knows nothing about securities.

Question 72

Beck is an accountant who prepares her clients' tax returns. Cole is not an accountant, but he also prepares tax returns for clients. Under the Internal Revenue Code, liability for preparing a false return may be imposed on​

A) ​Beck and Cole.
B) ​Beck only.
C) ​Cole only.
D) ​none of the choices.