Question 1

The traditional defenses of contributory negligence and comparative negligence do not apply in a negligence action against an accountant.

Accepted Answer

The defenses of contributory negligence and comparative negligence can apply in negligence actions against accountants, as these defenses are not limited to any specific profession. They are general defenses available in negligence cases to mitigate or bar recovery if the plaintiff contributed to their own harm.

Question 2

When an accountant violates a duty, he may be called before an administrative body, but not a judicial body.

Accepted Answer

When an accountant violates a duty, he may be called before both an administrative body and a judicial body. Administrative bodies may impose sanctions or penalties, while judicial bodies may impose fines or imprisonment.

Question 3

Which of the following statements is true of negligence by an accountant?

Accepted Answer

The traditional defenses of contributory negligence and comparative negligence may apply in a negligence action against an accountant. However, many courts hesitate to allow the client's contributory negligence to excuse the accountant's negligence because of the accountant's superior skills. The defense is more likely to succeed in an instance in which the client failed to follow the accountant's advice or in which the client already was aware of the irregularities before the accountant failed to discover them.

Question 4

Accuracy Group, an accounting firm, has been given a deadline by its client to prepare an audit report by February 28. The deadline was proposed by a prospective lender to the client. Accuracy Group agrees to complete the audit by February 28. If the audit report is not finished until after the deadline, then Accuracy Group would:

Accepted Answer

Accuracy Group agrees to complete an audit by February 28 because it has been informed of a deadline set by a prospective lender to the client. If the audit report is not finished until the end of March, then it would be liable for the client's resulting loss if the lender has no more funds available at that time. Ordinarily, an accountant may not delegate her responsibilities without the consent of the client. This is because the contract is a personal one, based on the skill, training, and personality of the accountant.

Question 5

The working papers that an accountant prepares in making an audit belong to the accountant, not the client.

Accepted Answer

The working papers are owned by the accountant and are considered confidential information that should not be disclosed to anyone without proper authority or permission. The client may have access to them, but they do not own them.

Question 6

Many courts today have refused to apply the privity doctrine to third-party negligence suits against accountants.

Accepted Answer

Many courts have expanded the scope of who can sue an accountant for negligence beyond just their immediate client, and have allowed third-party claims to proceed in certain circumstances. Therefore, the privity doctrine (which limits liability only to parties with whom the accountant has a contractual relationship) is no longer always applied.

Question 7

Jiang, an accountant, is assigned by Wanley Inc. to perform an audit and prepare an annual report for its shareholders. Jiang fails to execute his duty with sincerity as he fails to discover embezzlement by a chief accountant of the firm, which is later discovered by the firm's creditors. In this scenario, Jiang's breach of duty might also trigger an action in breach of the contract between Jiang and Wanley Inc. because:

Accepted Answer

The main basis of liability for accountants is the duty to exercise ordinary skill and care. Breach of this duty may lead to an action grounded in the tort of negligence. Closely related are the suits stemming from the agency relationship between the accountant and the client. As this relationship is contractual in nature, breach of the duty might also trigger an action in breach of contract. In the above case, Jiang failed to execute his duty with sincerity as he did not discover embezzlement by a chief accountant of the firm. Hence, his breach of duty might also trigger an action in breach of contract.

Question 8

An accountant may be forced by a subpoena to make available to the Internal Revenue Service (IRS) working papers involving a client who is being investigated.

Accepted Answer

An accountant can be legally obligated to provide working papers to the IRS when subpoenaed as part of an investigation into a client's tax affairs.

Question 9

The Restatement (Second) of Torts theory of liability imposes less liability on accountants than does the Ultramares rule.

Accepted Answer

The Restatement (Second) of Torts theory of liability actually imposes more liability on accountants than the Ultramares rule, as it allows for liability to third parties who are part of a limited group that the accountant intends to supply information to, whereas Ultramares limits liability to parties in privity or near privity.

Question 10

State licensing boards that regulate the ethical conduct of the accounting profession strictly regulate the accountants' right to advertise their services to the public.

Accepted Answer

State licensing boards do regulate the ethical conduct of accountants, but they do not strictly regulate the right to advertise services, as long as the advertising is not false or misleading.

Question 11

Hawthorne Corp. entrusted Edgar, an independent accountant, to prepare an audit report to apply for a loan from Daft Corp. Edgar accepted the accuracy of the client's books without proper investigation while representing that he had completed Hawthorne's audit. A careful audit, however, discovers later that an employee of Hawthorne Inc. was regularly embezzling funds. In this scenario, Edgar:

Accepted Answer

If an accountant represents that he completed an audit of the client when in reality he merely accepted the accuracy of the client's books without investigation and a careful audit discovers that an employee of the client was regularly embezzling funds from the client, the accountant may be liable in fraud for any losses suffered by the client from the time when the audit should have discovered the embezzlement. In the above case, Edgar is liable to Hawthorne Corp. for any losses it suffered as a result of Edgar's failure to discover the embezzlement.

Question 12

An accountant who violates the federal securities acts may be subjected to an administrative hearing before the Federal Trade Commission (FTC).

Accepted Answer

The Federal Trade Commission (FTC) does not have jurisdiction over violations of federal securities acts. The responsibility for enforcing these acts falls under the jurisdiction of the Securities and Exchange Commission (SEC).

Question 13

Section 11(a) of the Securities Act of 1933 explicitly imposes liability on accountants for misstatements or omissions of material facts in the information they furnish for registration statements required by the 1933 Act.

Accepted Answer

Section 11(a) of the Securities Act of 1933 does indeed impose liability on accountants for misstatements or omissions of material facts in the information they furnish for registration statements required by the 1933 Act.

Question 14

Generally accepted accounting principles:

Accepted Answer

Organizations representing the public accounting profession have developed and issued guidelines for conducting accounting work. Generally accepted accounting principles (GAAP) apply to the way business transactions should be recorded. Generally accepted auditing standards (GAAS) give directions to accountants in auditing the books of an enterprise.

Question 15

The main basis of liability for accountants is the duty to exercise ordinary skill and care.

Accepted Answer

The duty to exercise ordinary skill and care is the main basis of liability for accountants, as they are expected to meet a certain standard of competence and care in their work. This duty is based on the profession's code of ethics and professional standards, and failure to meet this duty can result in legal liability for the accountant.

Question 16

The liability of the accountant can be both civil and criminal.

Accepted Answer

Accountants can be held liable for both civil and criminal offenses, depending on the specific circumstances of the case. Civil liability refers to situations where the accountant is held responsible for financial losses or damages experienced by their clients, while criminal liability can result in fines, imprisonment, or other penalties for activities such as fraud, embezzlement, or other illegal actions.

Question 17

An accountant cannot be held liable for aiding and abetting misleading information if the information were prepared by others.

Accepted Answer

An accountant can be held liable for aiding and abetting misleading information even if the information were prepared by others. The accountant has a responsibility to ensure the accuracy of the information provided to the public or stakeholders.

Question 18

Under Section 11(a) of the Securities Act of 1933, the purchaser can recover even if he had not read the registration statement containing the material misstatements or omissions.

Accepted Answer

This is known as the "strict liability" provision, meaning that the issuer is liable for any material misstatements or omissions in the registration statement regardless of whether or not the purchaser actually read it.

Question 19

Section 10(b) and Rule 10b-5 of the 1934 Act have been the basis of most of the suits by investors against accountants.

Accepted Answer

Section 10(b) and Rule 10b-5 of the 1934 Act have been commonly used to bring securities fraud claims against accountants who are alleged to have made material false statements or omissions in connection with a client's financial statements or other filings.

Question 20

Under Section 11 of the Securities Act of 1933, the purchaser must sue the accountant within three (3) years after the time the misstatement or omission was or should have been discovered.

Accepted Answer

Under Section 11 of the Securities Act of 1933, the statute of limitations is one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, and in no event shall any such action be brought more than three years after the security was bona fide offered to the public.

Quiz 32: Legal Liability of Accountants