Deck 43: Accountants Legal Liability

Question 1

Accountants are subject to civil liability under the Securities Act of 1933 if the financial statements they prepare or certify for inclusion in a registration statement contain any untrue statement or omit any material fact, but only if reliance on the financial statements is proven.

Answer 1

False

Question 2

An accountant is negligent if she does not exercise the degree of care a reasonably competent accountant would exercise under the circumstances.

Answer 2

True

Question 3

An accountant is subject to potential civil liability arising from the professional services he provides to his clients and third parties.

Answer 3

True

Question 4

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

Question 5

Both the common law and federal law recognize an accountant-client privilege.

Question 6

For an accountant to be civilly liable under Rule 10b-5, the accountant must have acted with scienter.

Question 7

An accountant who substantially performs his contractual duties is generally entitled to be compensated for the contractually agreed-upon fee, less any damages caused to the client.

Question 8

Criminal sanctions for accountants are limited to punitive fines.

Question 9

An accountant who willfully violates Section 11 of the Securities Act of 1933 is subject to fines of up to $100,000 or imprisonment of not more than three years, or both.

Question 10

An accountant-client privilege is statutorily recognized in all states, permitting the accountant to refuse to disclose confidential information gleaned from his client.

Question 11

An accountant who contractually promises to conduct an audit to detect possible embezzlement is under a contractual obligation to provide an expanded audit beyond generally accepted auditing standards.

Question 12

Mary tells her accountant, "I must have this year's audit completed by March 1, and time is of the essence." 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 13

Historically, an accountant's liability for negligence extended only to the client and third party beneficiaries.

Question 14

In recent years, accountants have been subject to civil lawsuits based on the Racketeering Influenced and Corrupt Organizations Act.

Question 15

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

Question 16

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

Question 17

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

Question 18

Under the Securities Exchange Act of 1934, an accountant's liability for false or misleading statements is based on a good faith negligence standard.

Question 19

An accountant may not disclose the contents of his working papers under any circumstances.

Question 20

To lessen his tax liability, a client asks his accountant to misstate information on his tax return. If the accountant does so, she may be subject to fines and up to three years in prison.

Question 21

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 22

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 23

An accountant who willfully violates Section 11 of the 1933 Securities Act is subject only to civil liability.

Question 24

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

Question 25

The Private Securities Litigation Reform Act of 1995 provides that an auditor can be held liable in a private action for any finding, conclusion, or statement expressed in the report the Act requires the auditor to make to the SEC.

Question 26

Accountants' liability under the 1933 and 1934 Securities Acts is less extensive and has more limitations than liability under the common law.

Question 27

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

Question 28

The lead audit partner having primary responsibility for an audit and the partner responsible for reviewing the audit must rotate at least every 3 years.

Question 29

Which of the following is untrue regarding the relationship of an accountant and the client?

A) It is based upon mutual agreement.
B) The accountant is under an ethical obligation not to disclose confidential information.
C) The accountant must act in a competent and professional manner.
D) The accountant is under a contractual obligation to follow all of the client's instructions and to use the client's figures without question.

Question 30

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

Question 31

A five-member Public Company Accounting Oversight Board oversees the audit of public companies, and the SEC oversees the Board.

Question 32

In the Ernst & Ernst v. Hochfelder case, the Supreme Court stated that Section 10(b) of the 1934 Act and SEC Rule 10b-5 apply only to intentional conduct and not to negligence.

Question 33

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

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

Question 34

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

Question 35

An accounting firm may perform both bookkeeping services and audits for the same client.

Question 36

When can an accountant release audit working papers?

A) Only when a client consents.
B) Only w hen a court orders disclosure.
C) At any time at the discretion of the accountant.
D) Either when a client consents or when a court orders disclosure.

Question 37

The group responsible for registering public accounting firms that prepare audit reports for issuers; overseeing the audit of public companies; establishing audit report standards and rules; and inspecting, investigating, and enforcing compliance on the part of registered public accounting firms is the:

A) FTC.
B) Public Company Accounting Oversight Board.
C) SEC.
D) American Institute of Certified Public Accountants.

Question 38

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 39

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 40

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

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

Question 41

In which of the following situations would an accountant be subject to criminal liability?

A) Where the accountant negligently performed an audit.
B) Where the accountant willfully omitted a material fact on a securities registration statement.
C) Where the accountant refused to turn over working papers to a client.
D) Where the accountant willfully breached a contract.

Question 42

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 43

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 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

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

Question 45

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 surrender her working papers unless the client consents or a court orders the disclosure.
D) All of these are correct.

Question 46

Matthew decides to invest in the stock of a television production company after he reads Edgar's audit, which includes a known falsity as to the value of numerous worthless securities held as corporate assets. If Matthew sues Edgar, he will be entitled to:

A) nothing, in a majority of states, since the class of foreseen users of the audit contract does not include potential investors and the general public.
B) compensatory damages, in a majority of states, if he is a foreseen user of the audit.
C) nominal damages only.
D) rescission of his purchase contract.

Question 47

To whom does an accountant have potential liability?

A) To his client only.
B) To an intended third party beneficiary.
C) To a foreseen user of the accountant's work.
D) All of these.

Question 48

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

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

Question 49

Diane prepared a registration for the first issuance of stock of the Ledmar Corporation. Diane 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 Diane's statement was misleading, because some of the information given to her by the corporation was false. Diane had tried to verify the information, but was not able to do so. An investor is now suing Diane claiming that she violated the 1933 act. Is Diane liable?

Question 50

Juanita 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, proof of 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 Juanita and the auditor.

Question 51

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

A) Anna is not entitled to any compensation for her services.
B) Anna does not have liability to third party intended beneficiaries.
C) Anna is entitled to the contractually agreed upon fee less any damages or loss her breach has caused her clients.
D) Anna will get full compensation only after she corrects the breach.

Question 52

Audit working papers would include which of the following?

A) Records of accounting and auditing procedures and tests performed.
B) Engagement letters.
C) A collection of IRS rulings related to auditing in general.
D) Accountant fees accrued for the year from all accounts.

Question 53

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 54

Which of the following is correct with respect to the accountant-client privilege?

A) The common law recognizes such a privilege.
B) Federal law recognizes such a privilege.
C) Some states statutorily recognize such a privilege.
D) All of these are correct.

Question 55

Edmund, who is auditing the books of Windgrove Co., becomes aware of information indicating an illegal act within the company. Edmund must:

A) determine whether an illegal act occurred and, if it did, the possible effect on Windgrove's financial statements.
B) notify the SEC immediately so it can conduct an investigation.
C) resign immediately to avoid criminal liability.
D) notify local law enforcement and remove himself from any association with the company.

Question 56

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

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

Question 57

Which of the following would NOT constitute scienter?

A) Negligent performance of a substandard audit.
B) Actual knowledge of fraud.
C) Reckless disregard for truth.
D) Being paid to conceal fraud.

Question 58

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

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

Question 59

In what situations is the accountant-client privilege recognized?

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

Question 60

Barbara, a CPA, fails to discover a fairly obvious error in the books of her client, Banana Computers. If Ben relies on Barbara's certification of the financial statement in deciding to accept the position of president of the company, Barbara will:

A) in most states be liable to Ben as a third party beneficiary of her contract with Banana.
B) be liable to Ben only if she has a contract with Ben.
C) not be liable if Ben is not a party to the original contract.
D) not be liable to Ben unless Ben notified Barbara in advance of his intention to rely on the financials.

Question 61

Taylor, who is conducting an audit of Oakwood Corporation, becomes aware of information that indicates Oakwood was involved in an illegal payment. Discuss Taylor's responsibilities.

Question 62

A group of investors brings a class action lawsuit against the Z & R Accounting Firm under Section 10b and Rule 10b-5 of the 1934 Securities Act. Angela, an accountant with the firm, had done an audit of the Pennymart Inc. books. The audit failed to disclose that Orrin, the president of Pennymart, had stolen large amounts of cash from the firm. Pennymart eventually filed for bankruptcy as a result of the thefts. 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

What are the requisite elements of fraud?

Question 65

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

Question 66

List the services that the Sarbanes-Oxley Act prohibits accounting firms from performing for audit clients.