Deck 44: Accountants Legal Liability

Question 1

Foreseen plaintiffs under the Restatement view of tort liability for an accountant include potential investors and the general public.

Answer 1

False

Question 2

Under the majority view and the Restatement test for determining liability,negligence of an accountant in conducting an audit may result in damage awards to potential investors.

Answer 2

False

Question 3

An implied agreement in the contractual relationship is the agreement by the accountant to act in a competent and professional manner.

Answer 3

True

Question 4

An accountant-client privilege is statutorily recognized in some states and would generally permit the accountant to refuse to disclose confidential information gleaned from his client.

Question 5

The client is generally held to be the owner of the working papers the accountant uses in performing an audit.

Question 6

An accountant who commits fraud may be held liable for compensatory,but not punitive,damages.

Question 7

An accountant cannot be compelled to disclose the contents of his working papers,even under a court order.

Question 8

Scienter is not a requirement for an accountant to be civilly liable under Rule 10b-5.

Question 9

The common law recognizes an accountant-client privilege.

Question 10

An accountant who contractually promises to conduct an audit to detect possible embezzlement is under a contractual obligation to provide for the client an expanded audit beyond Generally Accepted Auditing Standards.

Question 11

Most courts allow an accountant to raise the defense of the plaintiff's contributory or comparative negligence.

Question 12

Heather tells her accountant,"I must have this year's audit completed by March 1." The accountant agrees to complete the audit by March 1.Under general contract law,if the audit is not completed by March 1,Heather does not have to pay the accountant for the audit.

Question 13

An accountant has a duty to comply with court orders,client requests,and Generally Accepted Auditing Standards with regards to disclosure of a client's confidential information.

Question 14

As a result of the Sarbanes-Oxley Act,the lead audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit must rotate at least every three years.

Question 15

A tax client wishing to defer income he earned this year asks his accountant to misstate information on his tax return.If the accountant does so,she may be subject to fines and up to five years in prison.

Question 16

An accountant's liability under the federal securities laws is basically the same as the liability at common law.

Question 17

Criminal sanctions for accountants are limited to punitive fines.

Question 18

For negligence cases,the Restatement has adopted the requirement of privity as set forth in the landmark opinion of Judge Cardozo in Ultramares Corp.v.Touche.

Question 19

In most statutes granting an accountant-client privilege,it belongs to the client and not to the accountant.

Question 20

Historically,privity of contract was not a requirement for a cause of action based on an accountant's liability for negligence.

Question 21

An accountant who substantially performs his contractual duties under a contract with a client is entitled to compensation at the agreed upon rate less any damages he has caused the client.

Question 22

Shane agrees to perform an audit for ShowCo within 30 days,knowing that time is of the essence.When the 30 days are up,Shane has only performed 60% of the audit.Shane has materially breached his contract with ShowCo.

Question 23

The failure by an accountant to use the care of a reasonably competent accountant is:

A) negligence.
B) material breach.
C) substantial performance.
D) fraud.

Question 24

Accountants authorized under federal law to practice before the IRS have the privilege of confidentiality for tax advice given to their client-taxpayers with respect to Internal Revenue Code matters.

Question 25

An accountant's records,including the data-gathering process followed and the information and conclusions drawn therefrom are known as:

A) tax returns.
B) working papers.
C) rough drafts.
D) privileged communication.

Question 26

An accountant who acts in a reasonably competent and professional manner is an insurer of the accuracy of her report.

Question 27

Which of the following is correct with regard to an accountant's contractual liability?

A) An accountant is bound to perform all the duties she explicitly agrees to perform
B) An accountant implicitly agrees to perform a contract in a competent and professional manner
C) An accountant who breaches his contract with a client may also be liable to a third party intended beneficiary
D) All of these are correct.

Question 28

What sort of liability does an accountant have under the Securities Exchange Act of 1934?

A) Civil liability where there is scienter
B) Criminal liability where there is a willful violation
C) Both of these are correct.
D) Neither of these is correct.

Question 29

An accountant who willfully violates Section 11 of the 1933 Securities Act will be subject to criminal liability.

Question 30

The Ultramares case involved the liability of an accountant under the Securities Act of 1933.

Question 31

An accountant has no liability to third parties other than the client.

Question 32

The court's holding in Ultramares Corporation v.Touche:

A) emancipates accountants from the consequences of fraud.
B) relieves accountants from liability for reckless misstatement.
C) establishes that an accountant's liability for negligence is limited to cases in which there is privity of contract.
D) shows no concern for exposure of accountants to liability in an indeterminate amount for an indeterminate time to an indeterminate class.

Question 33

The historic Ultramares doctrine is still the standard followed by most modern courts in deciding cases of accountants' liability.

Question 34

Which of the following defenses may be raised by an accountant under Section 11 of the 1933 Securities Act?

A) Privity and due diligence
B) Privity,but not due diligence
C) Due diligence,but not privity
D) Neither privity nor due diligence

Question 35

Which of the following could give rise to an accountant's criminal liability?

A) Falsely completing a tax return
B) Tampering with accounting records
C) Advising a client to falsely complete his own tax return
D) All of these could subject an accountant to criminal liability.

Question 36

Section 11 of the 1933 Securities Act imposes liability upon an accountant for negligence in the conduct of an audit.

Question 37

The Sarbanes-Oxley Act prohibits accounting firms from performing which of the following additional services for audit clients?

A) Bookkeeping
B) Implementing financial information systems
C) Actuarial services
D) All of these

Question 38

Which of the following can be the basis for an accountant's liability under state law?

A) Contract law and negligence,but not criminal law
B) Tort law,contract law,and criminal law
C) Negligence,criminal law,and strict liability
D) Intentional torts and negligence,but not contract law

Question 39

An accountant's legal liability is imposed both by the common law at the state level and by securities laws at the federal level.

Question 40

In which of the following types of cases can issues of accountant-client confidentiality arise?

A) Civil litigation
B) Criminal cases
C) Tax disputes
D) All of these are situations where it can arise.

Question 41

Which of the following would NOT constitute scienter contributing to liability under Rule 10b-5?

A) Negligent conduct
B) Intentional conduct
C) Reckless disregard for truth
D) Knowing conduct

Question 42

Audit working papers would include all but:

A) accountant fees accrued for the year from all accounts.
B) information disclosed during the audit.
C) conclusions reached.
D) records of accounting and auditing procedures and tests performed.

Question 43

Pam certified a statement prepared by Jace,her employee,without checking his work.Jace was never known to be anything but diligent and his integrity had never been questioned.The audit contained gross misstatements.Pam defends a suit against her claiming "due diligence." She will:

A) succeed,since she had no reason to believe her employee would lie.
B) succeed,because a reasonable person would not have inquired further.
C) fail,because due diligence requires reasonable investigation.
D) fail,because she is automatically liable for her employee's act.

Question 44

An accountant can ethically disclose a client's confidential information if the accountant complies with:

A) the client's consent.
B) Generally Accepted Auditing Standards.
C) a court order.
D) All of these.

Question 45

Zander decides to invest in the stock of Wolf Enterprises after he reads Edgar's audit,which includes a statement,known by Edgar to be false,as to the value of numerous worthless securities held as corporate assets.If Zander sues Edgar in a state using the broadest test for determining an accountant's liability for negligence to third parties,he will be entitled to:

A) nothing,since he is an incidental beneficiary of the audit contract.
B) damages if he is a reasonably foreseeable plaintiff.
C) have Edgar complete a new audit.
D) rescission of his purchase contract.

Question 46

Which of the following is correct with respect to an accountant's working papers?

A) The client is held to be the owner of an accountant's working papers.
B) An accountant must surrender his working papers to his client if the client so requests.
C) An accountant may not disclose the contents of his working papers unless the client consents or a court orders the disclosure.
D) All of these are correct.

Question 47

Wurst & Wurst is the accounting firm that has been used by the Intercontinental Bank for over twenty years.Ben approached Alfred,a Wurst partner,at a cocktail party.Ben asked about the Bank's stability.Although Alfred knew that the bank's stock was overvalued because of some loans to third world countries,he felt a considerable amount of loyalty to the bank for being a good customer of his accounting firm.Alfred told Ben that Wurst had just finished an audit of the bank,and that the bank was as sound as the Rock of Gibraltar.The next day Ben bought 1,000 shares of Intercontinental.One month later,the bank's losses became the subject of a major financial scandal.Ben is angry and wants to sue.Does Ben have a case?

Question 48

The Sarbanes-Oxley Act was enacted in response to:

A) accountants' requests for definitive guidelines for their profession.
B) business scandals involving companies such as Enron,WorldCom,and the Arthur Andersen accounting firm.
C) the need to lighten the oversight and enforcement responsibilities of the SEC.
D) the Ultramares Corporation v.Touche case.

Question 49

Accountants would be subject to criminal liability where they:

A) negligently perform an audit.
B) willfully omit a material fact on a securities registration statement.
C) refuse to turn over working papers to a client.
D) willfully breach a contract.

Question 50

Under the Private Securities Litigation Reform Act of 1995,those who audit financial statements required by the 1934 Securities Exchange Act must establish procedures capable of:

A) detecting material illegal acts.
B) identifying material related to party transactions.
C) evaluating whether there is a substantial doubt about the issuer's ability to continue as a going concern during the next fiscal year.
D) All of these.

Question 51

Sara holds 1,000 shares of stock in Olive,Inc. ,which she purchased,based upon the financial statements that Adam had prepared.She now realizes that the statements were false and wants to sue Adam for common law fraud.What is Adam's best defense?

A) Sara lacks privity of contract.
B) Adam gave a broad disclaimer as part of the financial statement.
C) The false statements were immaterial.
D) Olive,Inc contributed to the misstatement.

Question 52

Henry prepared a registration for the first issuance of stock of the Winzell Corporation.Henry took the assignment very seriously and spent a great deal of time preparing the statement.Two years after the statement was filed,the SEC began to investigate the company and claims that the information in Henry's statement was misleading,because some of the information given to him by the corporation was false.Henry had tried to verify the information,but was not able to do so.An investor is now suing Henry claiming that he violated the 1933 act.Is Henry liable?

Question 53

The Public Company Accounting Oversight Board can impose sanctions in its disciplinary proceedings,including:

A) revocation of an accounting firm's registration,only on a temporary basis.
B) a permanent ban on a person's associating with any registered firm.
C) monetary penalties of $1 million for natural persons.
D) monetary penalties of no more than $10 million for an accounting firm.

Question 54

The accountant-client privilege is recognized:

A) only in federal court proceedings.
B) by virtue of the common law in most states.
C) only in those states that have enacted statutes creating such a privilege.
D) in most states by reason of court decisions.

Question 55

An accountant's legal responsibility under state law may be based upon:

A) contract law.
B) tort law.
C) criminal law.
D) all of these.

Question 56

A group of investors bring a class action lawsuit against the H & R Accounting Firm under SEC Rule 10b-5 of the 1934 Securities Act.Richard,an accountant with the firm,had prepared financial reports filed with the SEC for the Paymark Company.The reports contained false information of a material fact,and this led to financial loss to the investors who relied on the reports.What is the likely result of the suit?

Question 57

If an auditor of financial statements required by the 1934 Act becomes aware of an illegal act,the auditor must:

A) inform the issuer's management and make sure the audit committee or the board of directors is adequately informed.
B) notify the SEC within one day of discovering the illegal act.
C) resign if the issuer does not notify the SEC of the illegality within ten business days.
D) be subject to criminal penalties if the auditor willfully violates the Reform Act by not resigning or furnishing reports to the SEC.

Question 58

Willa has a contract to perform accounting services for Entollo Corporation.She breaches her contract in a nonmaterial way.Which of the following is correct with respect to Willa's right to be paid for her work?

A) Willa is not entitled to any compensation for her services.
B) Willa will be paid only if her contract does not specify that it is a "satisfaction" contract.
C) Willa is entitled to the contractually agreed upon fee less any damages or loss her breach has caused her clients.
D) Willa is entitled to full compensation since the breach is nonmaterial.

Question 59

Baxsen,Inc.wanted to acquire the common stock of the Acme Corporation and hired Clark to audit the financial statements of Acme.Clark failed to discover a large embezzlement by Acme's chief financial officer.In a common law action by Baxsen against Clark,Baxsen must at a minimum prove:

A) ordinary negligence on Clark's part.
B) gross negligence on Clark's part.
C) fraud on Clark's part.
D) scienter on Clark's part.

Question 60

Claire works for Mattco but owns no Mattco stock.She buys 10 shares of a new issue of company stock and afterward receives the signed registration statement,which contains an untrue statement of material fact.Because Claire works for Mattco,she recognizes the error.Can Claire sue the auditor?

A) Yes,under Section 11,reliance is usually not required.
B) Yes,if she can prove she would not have bought the stock otherwise.
C) No,because she did not rely on the statement.
D) No,because there is no privity between Barbara and the auditor.

Question 61

What are the requisite elements of fraud?

Question 62

What is the basis for an accountant's potential criminal liability in rendering professional services?

Question 63

Identify three ways the Sarbanes-Oxley Act affects accountants and auditors.

Question 64

In providing services for his client,an accountant obtains information concerning the client's business affairs.What are the legal issues concerning this client information?