Deck 47: Accountants Liability and Malpractice

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

General causation principles of negligence apply to the law of malpractice.

Answer 3

True

Question 4

In many instances, malpractice is both a breach of contract and a tort.

Question 5

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

Question 6

A court will generally allow an action by a third party who acquires an accountant's work product without the accountant's knowledge or permission and is damaged because of a false statement in the work.

Question 7

When an accountant makes a contract to perform services, there is a duty to exercise the skill and care that are common for the accounting profession.

Question 8

When a malpractice claim is brought by a third person rather than a client or patient of the defendant, the malpractice action should be based on a tort theory such as negligence, gross negligence, or fraud.

Question 9

A client may recover tort damages from an accountant for fraud and gross negligence, but not for ordinary negligence.

Question 10

When an accountant fails to complete an accountant's contract, the accountant is still entitled to the accountant's fee.

Question 11

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

Question 12

In order to be valid, an accountant's disclaimer of liability must be (1) clear and unambiguous and (2) non-conspicuous.

Question 13

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 14

Under the "known-user" rule, it is sufficient if a user is a member of a known class, even if the identity of the particular user is not known to the accountant.

Question 15

A disclaimer based on lack of knowledge will always protect an accountant from liability.

Question 16

An accountant may be liable for malpractice if the accountant fails to inform a client of the tax consequences associated with selling a business.

Question 17

Disclaimers of liability are valid when the circumstances are such that it is not reasonable to expect the accountant to stand behind certain data.

Question 18

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

Question 19

Any disclaimer by an accountant that excludes liability for malpractice based on negligence is void.

Question 20

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

Question 21

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 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

An accountant may be able to raise the defense of lack of privity in a malpractice suit:

A) brought under federal securities statutes.
B) based on negligence.
C) based on fraud.
D) all of the above.

Question 24

The standard of care for accountants' liability for malpractice:

A) is the same in all cases.
B) does not vary from community to community.
C) requires accountants to exercise the degree of skill and care commonly exercised by others following the same calling within the same community.
D) requires accountants to exercise the degree of skill and care commonly exercised by the best accountants within the same community

Question 25

All negligence malpractice suits by third persons are prohibited by courts that follow the:

A) contract rule.
B) contact rule.
C) privity rule.
D) direct parties rule.

Question 26

To bring a tort action for malpractice, a plaintiff must show that the defendant's breach was at least:

A) intentional.
B) negligent.
C) reckless.
D) fraudulent.

Question 27

When a malpractice claim relates to advice given to a client, there are strong arguments for retaining the privity rule.

Question 28

The statute of limitations in a tort action for malpractice runs from:

A) the date when the harm occurs.
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 29

Accountants are equally liable to interlopers and rightful third parties.

Question 30

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 31

The contact rule applies in which of the following states?

A) Alabama
B) Indiana
C) New York
D) All of the above

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

Some courts have rejected the requirement of privity for malpractice and instead approach each situation on a case-by-case basis.

Question 39

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 described as:

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

Question 40

The privity rule has been:

A) relaxed in its application by some courts.
B) abandoned by all states.
C) retained by all states.
D) none of the above.

Question 41

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 the above.

Question 42

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 43

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 44

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 45

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) privity

Question 46

To help eliminate conflicts of interest, Sarbanes-Oxley prohibits certain activities by audit firms for their audit clients, including:

A) the design and implementation of financial information systems.
B) actuarial services.
C) management functions and human resources.
D) all of the above.

Question 47

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 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

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 50

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 51

__________ courts 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
B) A minority of
C) A majority of
D) All