Question 1

Regarding liability for negligence to third parties, under the Restatement test, 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 holds an accountant 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.

Question 2

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 is liable to those parties he or she reasonably should have foreseen would be injured through a justifiable reliance on the fraudulent information.

Question 3

A plaintiff may only recover under Section 11 of the Securities Act of 1933 if the plaintiff can establish that the plaintiff purchased securities in an initial public offering.

Accepted Answer

Under Section 11 of the Securities Act of 1933, accountants are civilly liable for misstatements and omissions of material facts made in registration statements the SEC requires.

Question 4

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 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 who did in fact use and rely on that work product for a proper business purpose.

Question 5

Accountants may not be sued for malpractice because that action is only available in the medical community.

Accepted Answer

Actions brought against attorneys, lawyers, real estate brokers, doctors, architects, and other professionals are referred to as malpractice actions.

Question 6

Which of the following established GAAP?

Accepted Answer

The generally accepted accounting principles (GAAP) were established by the Financial Accounting Standards Board (FASB).

Question 7

After a significant amount of responsibility for the bankruptcy of ____________ Corporation was placed on the firms that provided accounting services for the corporation, the role of accountants became a question of significant public interest.

Accepted Answer

After a significant amount of responsibility for the bankruptcy of the Enron Corporation was placed on the firms that provided its accounting services, accountants' role and accountability became a matter of significant public interest.

Question 8

When a federal law is at issue, state protection of an accountant-client privilege does not apply.

Accepted Answer

A number of states have adopted statutes granting some form of accountant-client privilege, but when a federal law is at issue, state protection does not apply.

Question 9

GAAS was established by which of the following?

Accepted Answer

The generally accepted auditing standards (GAAS) were established by the American Institute of Certified Public Accountants (AICPA).

Question 10

After an audit, the accountant is the legal owner of working papers.

Accepted Answer

After an audit, the accountant is the legal owner of working papers.

Question 11

Generally, unless engaged to detect __________, an accountant is not a fraud detector unless the fraud is uncovered in the course of exercising reasonable care and skill.

Accepted Answer

Generally, unless engaged to detect fraud, an accountant is not a fraud detector unless the fraud is uncovered in the course of exercising reasonable care and skill.

Question 12

Over the last few years, plaintiffs have been successful in bringing fraud suits against accountants under the Racketeer Influenced and Corrupt Organizations Act.

Accepted Answer

Over the last few years, plaintiffs have been successful in bringing fraud suits against accountants under the Racketeer Influenced and Corrupt Organizations (RICO) Act.

Question 13

Which of the following is false regarding compliance with GAAP and GAAS?

Accepted Answer

A state statute or judicial opinion may impose additional legal requirements on accountants beyond GAAP and GAAS.

Question 14

An action against an accountant for failing to properly perform the job for which the accountant was hired is referred to as a[n] _________ action.

Accepted Answer

Actions brought against attorneys, lawyers, real estate brokers, doctors, architects, and other professionals are referred to as malpractice actions.

Question 15

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 security 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 Court found that applying the "total mix" standard, the plaintiffs had adequately pleaded materiality and that they had also adequately pleaded scienter.

Question 16

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

Accepted Answer

At minimum, the duty of care of the accountant entails compliance with the generally accepted accounting principles (GAAP), established by the Financial Accounting Standards Board (FASB), and the generally accepted auditing standards (GAAS), established by the American Institute of Certified Public Accountants (AICPA).

Question 17

Which of the following was the result on appeal in the case in the text In re Century Aluminum Company Securities Litigation, the case in the text involving plaintiffs who purchased secondary-offering shares and who attempted to sue under Section 11 of the Securities Act of 1933 for misrepresentations allegedly released regarding the secondary offering?

Accepted Answer

Affirming dismissal of the lawsuit, the court determined that it would be "often impossible" for purchasers of aftermarket shares to have claims based on Section 11 because their purchasing is normally done through brokers that don't acknowledge the source of the shares. Thus, the court affirmed the dismissal of the lawsuit.

Question 18

What are the three primary types of liability assessed against accountants under common law?

Accepted Answer

Three primary types of liability are assessed to accountants under the common law: negligence, breach of contract, and fraud.

Question 19

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

Third-party liability, as decided by the states, falls into three general groupings: (1) privity or near-privity (the Ultramares rule), (2) foreseen users and classes of users (the Restatement rule), and (3) reasonably foreseeable users.

Question 20

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 chairman of WorldCom's board of directors faced charges of liability under Sections 11 and 15 of the Securities Act and Sections 10(b) and 20(a) of the Securities Exchange Act, and the judge denied his motion to dismiss motion on all counts, claiming that the chairman did not meet his burden of proof for any of the affirmative defenses.

Quiz 11: Liability of Accountants and Other Professionals

Regarding liability for negligence to third parties, under the Restatement test, 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.

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.

A plaintiff may only recover under Section 11 of the Securities Act of 1933 if the plaintiff can establish that the plaintiff purchased securities in an initial public offering.

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.

Accountants may not be sued for malpractice because that action is only available in the medical community.

Which of the following established GAAP?

After a significant amount of responsibility for the bankruptcy of ____________ Corporation was placed on the firms that provided accounting services for the corporation, the role of accountants became a question of significant public interest.

When a federal law is at issue, state protection of an accountant-client privilege does not apply.

GAAS was established by which of the following?

After an audit, the accountant is the legal owner of working papers.

Generally, unless engaged to detect __________, an accountant is not a fraud detector unless the fraud is uncovered in the course of exercising reasonable care and skill.

Over the last few years, plaintiffs have been successful in bringing fraud suits against accountants under the Racketeer Influenced and Corrupt Organizations Act.

Which of the following is false regarding compliance with GAAP and GAAS?

An action against an accountant for failing to properly perform the job for which the accountant was hired is referred to as a[n] _________ action.

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

What are the three primary types of liability assessed against accountants under common law?

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.

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.