Question 1

In the Case Opener "WorldCom," the court ruled that the chairman of WorldCom's board of directors could have no personal liability for misrepresentations of the company's condition in filings with the Securities and Exchange Commission.

Accepted Answer

The court ruled that the chairman of WorldCom's board of directors could be held personally liable for misrepresentations, as directors have a duty to ensure accurate disclosures in SEC filings.

Question 2

The reasonably foreseeable users test holds an accountant liable to any third-party who was or should have been foreseen as a possible user of the accountant's work product and did, in fact, use and rely upon that work product for a proper business purpose.

Accepted Answer

The reasonably foreseeable users test expands the scope of an accountant's liability beyond the primary beneficiary to include any third party that the accountant could reasonably foresee as relying on their work product for a proper business purpose. This test is based on the principle that accountants should be aware that their reports and audits can and will be used by others beyond their direct clients, and thus they have a duty to these foreseeable users as well.

Question 3

Under the Restatement test, regarding liability for negligence to third parties, an accountant is liable to known third-party users of the accountant's work product and also to those in the limited class whose reliance on the work the accountant specifically foresaw.

Accepted Answer

The Restatement test expands an accountant's liability for negligence beyond the primary client to include known third-party users of the accountant's work product and also those in a limited class whose reliance on the work the accountant specifically foresaw, recognizing a duty of care to these parties.

Question 4

The accountant-client privilege means that the accountant has the privilege of demanding payment for accounting services.

Accepted Answer

The accountant-client privilege refers to a legal concept that protects communication between a professional accountant and their client from being disclosed without the permission of the client. It does not relate to the right to demand payment for services.

Question 5

When hired to perform a task, the accountant enters into a contract called an engagement letter with the client that makes explicit and implicit promises, which, if not fulfilled, subject the accountant to liability.

Accepted Answer

An engagement letter is a contract between an accountant and a client that outlines the scope of the accountant's tasks, responsibilities, and the terms of the engagement. If the accountant fails to fulfill these promises, whether explicit (clearly stated) or implicit (inferred or understood without being directly stated), they can be held liable for breach of contract or negligence, among other potential legal issues.

Question 6

Which of the following was the result on appeal in the Case Opener involving the alleged breach of an oral contract based on the plaintiff lawyer loaning a corporate client funds and the client later reneging on a promise, made in gratitude, to give the lawyer three percent of the company's stock?

Accepted Answer

The answer of Which of the following was the result...

Question 7

At a minimum, the duty of care of the accountant entails compliance with which of the following?

Accepted Answer

The duty of care of an accountant involves adhering to both generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS), ensuring both accurate financial reporting and reliable audit practices.

Question 8

An accountant who commits fraud is liable to those parties he or she reasonably should have foreseen would be injured through a justifiable reliance upon the fraudulent information.

Accepted Answer

An accountant who commits fraud can be held liable to those parties that were foreseeable victims of the fraud, especially if these parties relied on the fraudulent information in a manner that was justifiable and led to their injury. This principle is rooted in the concept of duty of care in tort law, which extends to foreseeable victims of one's actions or misrepresentations.

Question 9

Many accountants and other professionals store confidential information on servers owned and maintained by a third party.

Accepted Answer

Many professionals, including accountants, often use cloud services provided by third parties for data storage, which involves storing confidential information on servers owned and maintained by these third-party companies.

Question 10

Plaintiffs have been successful in recent years bringing fraud suits against accountants under the Racketeer Influenced and Corrupt Organizations Act.

Accepted Answer

Plaintiffs have indeed been successful in recent years in bringing fraud suits against accountants under the Racketeer Influenced and Corrupt Organizations Act (RICO), as courts have allowed these cases to proceed based on allegations of fraudulent activities that fall under the act's provisions.

Question 11

The accountant is the legal owner of working papers after an audit.

Accepted Answer

The accountant or the accounting firm that conducts the audit typically retains ownership of the working papers, as they are considered the auditor's documentation of the work performed and evidence supporting the audit opinion.

Question 12

Which of the following was the result at the Supreme Court level in Matrixx Initiatives, Inc. v. Siracusano, the case in the text in which the plaintiffs brought a class action alleging that the defendant violated securities laws by failing to release reports that its product, Zicam Cold Remedy, had been found to result in a loss of smell?

Accepted Answer

The Supreme Court in Matrixx Initiatives, Inc. v. Siracusano ruled that the plaintiffs had adequately pleaded materiality and scienter under the "total mix" standard, allowing the lawsuit to proceed. This decision emphasized that the plaintiffs did not need to present statistically significant evidence to claim that the failure to disclose adverse effects (loss of smell from using Zicam) was material to investors.

Question 13

An action brought against an accountant who fails to properly perform the job for which the accountant was hired is known as a(n) ________ action.

Accepted Answer

Malpractice refers to the failure of a professional to perform their duties to the required standard of care, which applies to accountants who do not properly execute their job responsibilities.

Question 14

The Financial Accounting Standards Board established:

Accepted Answer

The Financial Accounting Standards Board (FASB) is responsible for establishing the generally accepted accounting principles (GAAP) in the United States, which are a set of rules and standards designed to ensure the consistency, comparability, and reliability of financial reporting.

Question 15

Whether third parties have a claim against an accountant on the basis of their reliance upon negligently prepared financial statements is the same in all states because it is governed by federal law.

Accepted Answer

The ability of third parties to claim against an accountant for negligently prepared financial statements varies by state, as it is governed by state law rather than federal law. Different states have different standards and rules regarding the liability of accountants to third parties.

Question 16

Due to Enron Corporation's ________, a significant amount of responsibility for that outcome was placed on the firms that provided accounting services to the corporation.

Accepted Answer

Enron Corporation's bankruptcy was a landmark case that highlighted the role of accounting firms in the financial collapse of the company. The bankruptcy, which was due to Enron's financial practices and accounting fraud, led to significant scrutiny and responsibility being placed on its accounting service providers.

Question 17

The attorney-client privilege means that information given by a client to his or her accountant cannot be revealed without the client's permission.

Accepted Answer

The attorney-client privilege specifically applies to confidential communications between a client and his or her attorney, not to information given to an accountant.

Question 18

Under common law, what are the three primary types of liability assessed against accountants?

Accepted Answer

Under common law, accountants can be held liable for negligence, breach of contract, and fraud. Negligence involves failing to exercise the degree of care expected of a professional, breach of contract occurs when the terms of an agreement are not met, and fraud involves intentional deception to secure unfair or unlawful gain.

Question 19

Accountants are exempt from being sued for malpractice; this is reserved for attorneys and doctors only.

Accepted Answer

Accountants, like attorneys and doctors, can also be sued for malpractice if they fail to perform their duties to the standard required of their profession, leading to financial loss or damage to their clients.

Question 20

State protection of an accountant-client privilege will always apply when a federal law is at issue because each state sets their own standards for accountant-client privilege.

Accepted Answer

State protection of an accountant-client privilege does not always apply when a federal law is at issue because federal law may not recognize such a privilege, especially in federal courts or under federal statutes, where federal rules of evidence or procedure apply.

Quiz 11: Liability of Accountants and Other Professionals