Deck 44: Accountants Legal Liability

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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 5

The common law recognizes an accountant-client privilege.

Question 6

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

Question 7

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 8

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 9

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

Question 10

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 11

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

Question 12

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.

Question 13

An accountant must disclose the contents of his working papers under a court order.

Question 14

Criminal sanctions for accountants are limited to punitive fines.

Question 15

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 16

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

Question 17

Mary 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, Mary does not have to pay the accountant for the audit.

Question 18

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

Question 19

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

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

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 22

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

Question 23

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

Question 24

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

Question 27

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

Question 28

In recent years, more and more courts have followed the Ultramares doctrine in deciding cases.

Question 29

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 30

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 31

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 32

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

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

Question 33

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 34

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 35

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

Question 36

When can an accountant release audit working papers?

A) When a client consents
B) When a court orders disclosure
C) Both of these.
D) Neither of these.

Question 37

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

Question 38

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 39

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

Question 40

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 41

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 42

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 43

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 44

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 45

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 46

Sara holds 1,000 shares of stock in B B & B, 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) B B & B contributed to the misstatement.

Question 47

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

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

Question 48

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 49

Tom decides to invest in the stock of Triad Television 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 Tom 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 50

Barbara works for Chevco but owns no Chevco stock. She buys 10 shares of a new issue of company stock as a savings plan and afterward receives the signed registration statement, which contains an untrue statement of material fact. Because she works for Chevco, she recognizes the error. Can she 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 51

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 52

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 53

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 54

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 55

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 56

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 57

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 58

Pam certified a statement prepared by John, her employee, without checking John's work. He 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 59

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 60

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 61

What are the requisite elements of fraud?

Question 62

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 63

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?

Question 64

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

Question 65

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