Question 1

An accountant is liable for any omission in a registration statement to a person who suffers a loss on the securities described in the statement.

Accepted Answer

The answer of An accountant is liable for any omission...

Question 2

Manufacturing Inc. hires Neri, an accountant, to maintain the company's financial records. Neri does not act negligently or fail to perform any duty but fails to discover that Ollie, the firm's chief finance officer, is embezzling funds from the firm. With respect to the corporation's losses, the accountant is

Accepted Answer

Neri, the accountant, did not act negligently or fail to perform any duty, and therefore is not liable for the embezzlement of funds by Ollie, the CFO. It is the responsibility of the CFO to ensure that funds are handled properly, and the accountant's role is to maintain accurate financial records. As long as the accountant fulfills their duties diligently and accurately, they cannot be held liable for the actions of others.

Question 3

In some states, a party can recover from an accountant for negligence only outside an accountant-client relationship.

Accepted Answer

Negligence claims against accountants generally require the existence of an accountant-client relationship, as the accountant owes a duty of care to their client. Some states may have specific circumstances where a non-client can recover from an accountant for negligence, but this is not the general rule.

Question 4

"A reasonably competent general practitioner of ordinary skill, experience, and capacity" is the normal standard of performance expected of

Accepted Answer

"A reasonably competent general practitioner of ordinary skill, experience, and capacity" is a legal term used to define the standard of care expected from attorneys in their professional practice. Therefore, option C is the correct answer.

Question 5

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

Accepted Answer

The answer of Penalties for aiding or assisting in the...

Question 6

In most states, accountants are subject to liability for negligence not only to their clients but also to foreseen or known users of the accountants' reports.

Accepted Answer

In most states, accountants can be held liable for negligence to anyone who can be foreseen as a user of their reports, not just their clients.

Question 7

It is a felony for anyone-not just accountants-to willfully make false statements in a tax return or to willfully assist others in preparing a false return.

Accepted Answer

Making false statements in a tax return or assisting others in preparing a false return is a felony and is punishable by law.

Question 8

Dena, an accountant, contracts to perform services for Equipment Maker Inc. Dena acts in good faith and conforms to generally accepted accounting principles, but makes an incorrect judgment. Dena is most likely

Accepted Answer

Dena acted in good faith and conformed to generally accepted accounting principles, which typically shields professionals from liability for honest errors in judgment.

Question 9

In most states, an attorney may be liable for negligence to a non-client who the attorney knows or reasonably should know will rely on the attorney's opinion.

Accepted Answer

This is known as the "foreseeable third party" doctrine and is recognized in many states. It means that if an attorney provides advice or services to their client, and that advice or service is relied upon by a non-client (such as a business partner or family member), the attorney may be held liable for any harm caused by their negligence.

Question 10

Because working papers are the property of an accountant, a client for whom the documents were used and developed has no right of access to them.

Accepted Answer

Working papers are indeed prepared by an accountant for a specific engagement, but clients generally have a right to access those documents related to their financial information, especially when such documents are necessary for the continuation of their business or for compliance with legal requirements. The ownership and rights to access working papers can vary by jurisdiction and specific contractual agreements between the accountant and the client.

Question 11

In some states, an accountant is potentially liable to any user who relies on the professional's statement or report whether or not the reliance was foreseeable.

Accepted Answer

The answer of In some states, an accountant is potentially...

Question 12

The Public Company Accounting Oversight Board oversees the audit of public companies subject to securities laws in order to protect public investors.

Accepted Answer

The statement is correct. The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act of 2002 to oversee the audit of public companies to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports.

Question 13

Under the Private Securities Litigation Reform Act, an accountant who participates in, but is unaware of, illegal conduct may be liable for proportionately less than the entire loss.

Accepted Answer

This is known as the "safe harbor" provision, which states that an accountant who unknowingly participates in illegal conduct is not liable for the entire loss, but only a proportionate amount based on their degree of involvement. This provision was introduced as part of the Private Securities Litigation Reform Act.

Question 14

An accountant should destroy working papers on the completion of an audit to avoid the possibility of having to provide evidence in a suit in which the accountant's competence is challenged.

Accepted Answer

An accountant should not destroy working papers after completing an audit as they serve as evidence of the work performed and support the conclusions reached. They can also be used in legal proceedings, so it is important to retain them for a certain period of time as required by professional standards and regulations.

Question 15

Once an attorney-client relationship arises, to encourage frankness, all communications between the parties are privileged.

Accepted Answer

This is known as attorney-client privilege, which protects confidential communications between an attorney and their client from being disclosed without the client's permission.

Question 16

Because of the potential for significant losses to sellers and buyers, under both of the federal securities acts, liability is imposed on accountants for all acts of negligence, including "mere" negligence.

Accepted Answer

Under the Securities Act of 1933, accountants can be held liable for "mere" negligence, but under the Securities Exchange Act of 1934, the standard is higher, requiring scienter (a form of intent or knowledge of wrongdoing) for liability to be imposed.

Question 17

An accountant is least likely to be held liable for accounting fraud if he or she

Accepted Answer

An accountant's failure to discover every impropriety in a client's books might not necessarily lead to liability for accounting fraud, especially if the accountant exercised due diligence and followed professional standards. In contrast, actively concealing information, failing to report suspicious activities, or directly engaging in fraudulent reporting would more likely result in liability.

Question 18

An attorney who becomes aware that a client has violated securities laws must report the violation to the Securities Exchange Commission-which creates a potential conflict with the attorney-client privilege.

Accepted Answer

Attorneys are obligated to report any violations of securities laws by their clients to the SEC, even if it means violating the attorney-client privilege. This is required under the rules of professional conduct for attorneys.

Question 19

An accounting firm can lawfully perform both auditing and non-auditing services for the same company at the same time because the firm could otherwise be exposed to potentially massive liability.

Accepted Answer

Performing both auditing and non-auditing services for the same company can create a conflict of interest, compromising the auditor's independence. Regulations such as the Sarbanes-Oxley Act in the U.S. restrict such practices to ensure audit integrity.

Question 20

Bell, an accountant, enters into a contract to provide services to Consumer Staples Inc. Bell fails to meet a regulatory deadline for the work. Required to pay a fine, the company files a suit against Bell. Most likely, the court will order

Accepted Answer

Bell has failed to meet the deadline, resulting in Consumer Staples Inc. having to pay a fine. This breach of contract has caused a loss to Consumer Staples, and therefore the court is likely to order Bell to pay the amount of the fine as damages to the firm. Option B is unlikely, as Bell has already failed to meet the previous deadline. Option C is unreasonable, as it is not the responsibility of the company to drop its suit and pay its fine. Option D may be a possibility, but only if Consumer Staples finds it feasible and practical to secure another professional to finish the work.

Quiz 40: Liability of Accountants and Other Professionals